Timken Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Timken Co. (TKR)

Timken (NYSE:TKR)

Q4 2013 Earnings Call

January 30, 2014 11:00 am ET

Executives

Steve Tschiegg - Director of Capital Markets & Investor Relations

James W. Griffith - Chief Executive Officer, President and Director

Glenn A. Eisenberg - Executive Vice President of Finance and Administration

Christopher A. Coughlin - Group President of Mobile and Process Industries Segments

Richard G. Kyle - Chief Operating Officer of Bearings & Power Transmission and Director

Ward J. Timken - Chairman

Analysts

Eli S. Lustgarten - Longbow Research LLC

Ross P. Gilardi - BofA Merrill Lynch, Research Division

Stephen E. Volkmann - Jefferies LLC, Research Division

David Raso - ISI Group Inc., Research Division

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Stanley S. Elliott - Stifel, Nicolaus & Company, Incorporated, Research Division

Operator

Good morning, everyone. My name is Thalian, and I'll be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's fourth quarter earnings release conference call. [Operator Instructions]

And at this time, Mr. Tschiegg, you may begin.

Steve Tschiegg

Thank you, and welcome to our fourth quarter 2013 earnings conference call. I'm Steve Tschiegg, the company's Director of Capital Markets and Investor Relations. We appreciate you joining us today. If after our call, you have further questions, please feel free to contact me at (330) 471-7446.

Before we begin our remarks this morning, I wanted to point out that we posted on the company's website presentation materials that supplement 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 Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; as well as Tim Timken, Chairman, Board of Directors; Rich Kyle, Chief Operating Officer, Bearings & Power Transmission; and Chris Coughlin, Group President.

This morning, Jim and Glenn will offer a few remarks and then all of us will be available for Q&A. During that 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.

Before I turn the call over to Jim, I'd like to remind you that today, you may hear forward-looking statements related to future financial results, plans and business operations. Actual results may differ materially from those projected or implied due to a variety of factors. We describe these factors in greater detail on today's press release and in our reports filed with the SEC, which are available on the www.timken.com website. Reconciliations between non-GAAP financial information and its GAAP equivalent are included in the press release. Today's call is copyrighted by the Timken Company. Any use, recording or transmission of any portion without the express written consent of the company is prohibited.

With that, I'll turn the call over to Jim.

James W. Griffith

Thanks, Steve, and good morning. In our earnings announcement earlier today, Timken reported fourth quarter sales of $1.1 billion with earnings of $0.55 per diluted share or $0.78 excluding unusual items. We ended the year consistent with our prior estimate posting 2013 sales of $4.3 billion, with earnings per diluted share of $2.74. Despite low levels of demand for many of our broad end-market segments, including industrial distribution, mining and heavy truck, we performed well while operating our plants at low levels of capacity. Both our bearings and steel businesses continue to demonstrate enterprise-wide operational excellence.

During the year, we advanced the company strategically and moved forward on our efforts to return cash to our shareholders. In September, we launched the project to separate the Steel business from our bearings and power transmission business to form 2 focused enterprises. And in the fourth quarter, we added a new initiative, restructuring the company's cost structure to position it for improved performance in 2014.

Let me address each of these efforts. First, we made a number of moves to position the company for long-term strategic success. They include completing 3 strategic acquisitions that further extend the scope of our product and service offering, as well as our geographic coverage, finishing 4 Steel capital investment projects totaling approximately $110 million that will increase our cost competitiveness and further differentiate our products and expand our capacity in critical product ranges.

We are on track with the installation of the $200 million continuous caster for our Faircrest steel plant, which we expect will come online in the third quarter. We also opened a new investor services center in Raipur, India, providing gear drive and bearing repair services to meet the customer demand in this target growth area.

Second, we returned capital to our shareholders, repurchasing 3.4 million shares. And in November, the Timken Board of Directors declared the company's 366th consecutive quarterly dividend. In total, we returned $277 million to our shareholders during the year. In addition, we ended 2013 with our pension plans fully funded.

Third, we're making very solid progress in separating our Steel business from the Timken Company. We launched this effort at the end of the third quarter and the work is going well. We are targeting a midyear separation and remain on track to achieve that goal. We expect to file our Initial Form 10 in the next couple of weeks, which will begin to map out the details of the new steel company.

In the meantime, let me give you a few pertinent facts. The steel company will be a new independent public company to be named TimkenSteel Corporation, and TimkenSteel will trade on the New York Stock Exchange under the symbol TMST. We expect the separation effort will cost approximately $105 million, the vast majority of which will be spent by the time of separation. As we communicated to you last summer, our initial estimates indicated a need to add approximately $25 million in new costs to the enterprise to setup the second corporate structure. The company now expects to take out approximately $20 million of corporate costs prior to the spinoff to help mitigate these additional expenses. We believe we have identified ways to mitigate the majority of the remainder of the approximately $45 million in dissynergies that we had outlined during our original analysis. We are developing investor relations programs for both companies, and we'll be providing much more information as we approach the launch date.

And finally, as we noted last quarter, recognizing that a rapid resumption of customer demand was unlikely, we launched an effort to rightsize the company for today's market environment. We, in fact, have moved forward to reduce SG&A expenses within our bearing business, expecting to reduce costs by approximately $25 million and anticipating that $20 million of that will impact 2014 earning. This is on top of the earlier referenced $20 million reduction in corporate costs. We expect approximately $15 million of that initiative to also impact 2014.

It's clear that the Timken Company had a good year in 2013 and we entered into 2014 pleased with our financial and operational accomplishments. We believe we have positioned the company well and expect a modest improvement in demand in 2014 as the economy continues to recover and key investment markets complete their inventory rightsizing. We are confident in our leadership team and in our ongoing ability to create shareholder value as we forge bright futures for both our bearing and steel organization.

Now here's Glenn.

Glenn A. Eisenberg

Thanks, Jim. Sales for the fourth quarter were $1.1 billion, a decrease of $17 million or 2% from a year ago. The decline is a result of lower demand in the industrial, mining and heavy truck end markets, as well as the impact from light vehicle, planned exits in Mobile Industries. This was partially offset by increased demand in the energy, rail, defense and steel related light-vehicle markets, as well as the benefit from acquisitions. From a geographic perspective, the sales decline was primarily in North America.

Gross profit of $264 million was down $15 million from a year ago. The decrease was driven by lower volume and the impact of lower LIFO income compared to last year, which were partially offset by lower material costs and the benefit of acquisitions.

Gross margin of 24.8% for the quarter was down 100 basis points from a year ago. Impairment and restructuring costs of $5 million in the quarter compared to roughly $1 million a year ago. The increase was due to $6 million of severance and related costs from the business cost reduction initiative Jim spoke about earlier. Partially offsetting this were lower cost related to the previously announced plant closures in St. Thomas and São Paulo.

Separation costs related to the proposed spinoff of the Steel business came in at $13 million for the quarter. We now estimate that our total separation costs will be approximately $105 million, down from our original estimate of $125 million. Of the $105 million, we expect $75 million to be expensed and $30 million capitalized.

Other expense for the quarter totaled $5 million of income compared to $4 million of expense in the same period a year ago. Income in the quarter was due primarily to a gain on sale of land in Brazil of roughly $5 million. We expect to record an additional gain of $25 million in the first quarter of 2014.

For the quarter, SG&A was $154 million, down $9 million from last year due to lower variable compensation and reduced discretionary spending, partially offset by acquisitions. SG&A was 14.5% of sales, a decrease of 60 basis points from last year. As a result, EBIT for the quarter came in at $96 million or 9% of sales, 120 basis points lower than last year.

Net interest expense of $6.5 million for the quarter was comparable to last year. The tax rate for the quarter came in at 41.2% compared to 27.8% last year. The increase relative to both last year and our prior estimate of 25% was principally driven by 2 discrete items. First, we incurred a one-time noncash tax charge of $26 million related to our global cash repatriation project, raising the rate by roughly 31 percentage points. This past quarter, the company implemented a strategy to repatriate approximately $365 million of cash to the U.S. at an effective tax rate of 7.3%. The company repatriated $123 million this month with the additional $242 million in cash to be repatriated in future period. This initiative improves liquidity in the U.S. to fund future capital allocation plans.

Partially offsetting this expense was a noncash tax benefit of roughly $12 million related to the reversal of income tax reserves as we closed out tax audits for certain prior year periods. This lowered the tax rate on the quarter by roughly 14 percentage points. The tax rate for the year was 36.9% compared to 35.3% a year ago. The increase relative to our prior tax rate estimate of 33% was driven by the 2 discrete tax items.

Going forward, we expect the effective tax rate to be approximately 34%, though the rate is expected to vary by quarter throughout 2014, primarily due to the timing and deductibility of the anticipated steel separation costs and other discrete items. We expect the first half tax rate of roughly 40% and a second half tax rate of about 30%.

Net income for the quarter was $52.6 million or $0.55 per diluted share compared to $0.78 per diluted share last year. In the quarter, there were $0.23 of unusual items that included separation costs associated with the spinoff of the Steel business of $0.11, severance due to the business cost reduction initiative of $0.04, CDO expense of $0.02 and discrete tax items totaling $0.15. These items were partially offset by income from our Brazil plant closure of $0.09, consisting of the gain on sale of land of $0.06 and the reversal of environmental reserves of $0.03. Excluding unusual items, earnings per share were $0.78 for the quarter compared to $0.80 a year ago.

Now I'll review our business segment performance. Mobile Industries' sales for the quarter were $337 million, down 7% from a year ago. The decrease was driven by the impact of approximately $30 million of lower sales from planned program exits, primarily in the light-vehicle sector. This was partially offset by improved rail demand and the Interlube Systems acquisition.

The Mobile segment had EBIT of $32 million or 9.5% of sales compared to $35 million or 9.6% of sales last year. The decline in EBIT was driven by lower volume and plant utilization, partially offset by lower SG&A and the benefit of acquisitions. In addition, the business had a year-over-year benefit of approximately $8 million primarily due to the gain on the sale of land in Brazil and lower restructuring costs, partially offset by severance costs this quarter related to the business cost reduction initiative.

The outlook for Mobile Industries' sales for 2014 is to be down 3% to 8%, primarily driven by the year-over-year impact of planned program exits of $110 million that concluded in 2013. Partially offsetting this decline is anticipated stronger demand in off-highway and rail end markets.

Process Industries' sales for the fourth quarter were $325 million, down 4% from a year ago. The decline was driven primarily by lower demand in U.S. industrial distribution, as well as lower industrial OE demand across most end market. This decrease was partially offset by the benefit of acquisitions.

For the quarter, Process Industries' EBIT was $54 million or 16.6% of sales, down from $61 million or 18.1% of sales last year. The decrease in EBIT was primarily result of lower volume, partially offset by lower manufacturing, material and SG&A costs. In addition, Process Industries had approximately $3 million of unusual costs in the quarter, primarily consisting of severance related to the business cost reduction initiative. Process Industries' sales for 2014 are expected to be up 7% to 12%, driven by improved demand across most of its industrial markets and the full year benefit of acquisition.

Aerospace sales for the fourth quarter were $89 million, up 5% from a year ago. The increase resulted from improved demand in the defense sector.

EBIT for the quarter was $5 million or 5.9% of sales compared to $10 million or 11.8% of sales a year ago. The decline in earnings resulted from higher manufacturing costs as we reduced inventory levels during the quarter, which benefited cash flow. In addition, EBIT was negatively impacted by $3 million due to restructuring charges and severance costs related to the business cost reduction initiative.

For 2014, we anticipate Aerospace sales to be up 5% to 10% reflecting increased demand across most end market.

Steel sales of $330 million for the quarter were up 4% from last year. The increase was primarily due to higher demand in the oil and gas and mobile on-highway market sectors, which was partially offset by decreased industrial demand. In addition, surcharges were up approximately $7 million.

EBIT for the quarter was $33 million or 10% of sales compared to $25 million or 8% of sales last year. The improvement reflects higher volume and lower manufacturing costs, material and SG&A costs, partially offset by the impact of LIFO.

Steel sales for 2014 are expected to be up 12% to 17% due to stronger demand in the oil and gas and industrial market, while mobile on-highway is expected to be flat. In addition, surcharges are expected to be up driven by stronger demand and higher material costs.

Looking at our balance sheet. We ended the quarter with cash of $385 million and net debt of $91 million. This compares to a net cash position of $107 million at the end of last year. The company ended the year with liquidity of $1.2 billion.

Operating cash flow for the year was $432 million, reflecting the company's earnings and lower working capital requirement. Free cash flow was $19 million, after capital expenditures of $326 million and dividends of $88 million. Excluding discretionary pension contributions of $66 million net of tax and CDO expense of $2 million net of tax, free cash flow for the year was $87 million.

In addition, throughout the year, the company purchased 3.4 million of its shares for $189 million. The company has approximately 4 million shares remaining under its current board authorized repurchase program and expects to continue to repurchase shares during the year.

The company ended the year with its global pensions funded at roughly 105% compared to 89% a year ago. The improvement was driven by the benefit of 100 basis point increase in the discount rate, favorable asset returns and pension contributions.

Turning to the outlook. Our estimates for 2014 are based on all 4 operating segments being in place for the full 12 months. We anticipate an improvement in sales for the year of around 6% compared to 2013 due to stronger demand and higher surcharges. Partially offsetting this is the year-over-year impact of approximately $110 million from planned exits in our Mobile Industries segment, which concluded in 2013. We expect earnings per diluted share to be in the range of $3.15 to $3.45.

Included in our earnings outlook, our cost totaling $0.35 per share for the following unusual items. Separation costs related to the spinoff of the Steel business of $0.55 and costs associated with the business cost reduction initiative of $0.10. Partially offsetting these costs is the remaining gain on the sale of land in Brazil of $0.30.

For 2014, the company expects cash from operating activities to be $560 million. Free cash flow is expected to be $165 million after capital expenditures of $310 million, of which $30 million is due to separation activities; and dividends of roughly $85 million.

We continue to make great progress on our separation activities related to our proposed tax-free spinoff the Steel business targeted to occur midyear. We expect to file our Form 10 with the SEC in early February, which will provide additional detail outlining the new standalone Steel business.

This ends our formal remarks. And now, we'll be happy to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Eli Lustgarten with Longbow Securities.

Eli S. Lustgarten - Longbow Research LLC

Clarification, I guess. I know we're exiting businesses in the Mobile business by $110 million. Is year-over-year comparison in '14 versus '13 another $110 million? Or why isn't that number in the '13 number? I mean, I'm not sure you cited that but I thought it's all impacted already in the '13 reported results.

Christopher A. Coughlin

Yes, Eli, this is Chris. The last program -- major program that we were exiting phased out in the third quarter and a little bit into the fourth quarter of 2013. So there is $110 million impact from exited business that you will see in the Mobile revenue in 2014. Around the end of the third quarter, we will be done talking about that exited business, but it's basically -- the business is gone and it's a run rate issue, '13 to '14. But that will conclude in the third quarter of this year.

Eli S. Lustgarten - Longbow Research LLC

And it's pretty evenly spread between the first 3 quarters, the $110 million?

Christopher A. Coughlin

Yes, for argument's sake, yes.

Eli S. Lustgarten - Longbow Research LLC

Fair enough. And can you talk about profitability you expect in most of the businesses as we look at 2014? Obviously, you've had a lot of pressure on margins this year and we got lots of costs floating all over the place there. So can we get some sense of what kind of profitability we should be able to expect in Mobile, Process, Aerospace and even Steel as we look out in '14 on an operating basis as opposed to all the other noise?

Richard G. Kyle

Eli, this is Rich. Let me take that for the ongoing 3 Timken Company segments. Putting aside the separation costs and some of the one-offs that Glenn referenced, we expect all 3 segments to be at double digit EBIT margins. We expect Aerospace and Mobile to be in the 10% to 13% range and Process in the high teens, call it, 17% to 20% range. The cost savings will be a little more rear-end loaded, but we don't have a significant rear-end load on the revenue side like we were baking a little bit last year. You saw on Glenn's guidance, relatively modest revenue increases, but the cost savings -- some of the cost savings will be coming through the course of the year and some of it upon separation as well.

Ward J. Timken

Eli, this is Tim. I would say, the story on the Steel side is similar. We're expecting improved profitability next year based on better volume, better mix, good cost control. Again, this would be net of any incremental costs that we would have to stand up the separate business.

Eli S. Lustgarten - Longbow Research LLC

And we're looking at margins in the 12% to 15% range, is that sort of the normalized earnings you expect?

Ward J. Timken

You're talking from a Steel perspective?

Eli S. Lustgarten - Longbow Research LLC

From a Steel perspective, yes.

Ward J. Timken

Yes, we will -- we'd solidly be in the double digits, yes. So that would be probably a pretty good range.

Operator

We'll move next to Ross Gilardi with Bank of America Merrill Lynch.

Ross P. Gilardi - BofA Merrill Lynch, Research Division

Could you just talk a little bit more about your assumptions behind the Steel sales growth of 12% to 17% in 2014? I realize you cited a number of drivers. But what really gives you confidence in that? And what specifically are you seeing in the mobile on-highway and oil and gas markets to drive your confidence? Are you seeing anything right now or is this just hope that things pick up in the second half of the year?

Ward J. Timken

Ross, this is Tim again. If you look at the 14%, you can probably put it into 2 buckets. Half would be improved volume and mix, the other half would be impact of raw material surcharge. Our belief that we're going to see scrap and alloys continue to run throughout the year as volumes in the industry get better. So on the volume and mix side, we're pretty optimistic about the Mobile numbers. Obviously, that sector is doing pretty well. We're calling it for us flat, although that would reflect a loss of business tied to the bearing platforms that Chris talked about earlier. So if you back that out, actually our mobile on-high will be up. In oil and gas, we're seeing solid growth on the oil and gas side right now. We're confident that continues to build throughout the year. And then the big question is on industrial. And I would say, within the industrial sector, there are parts that will do better than others. Obviously, having listened to the -- some of the calls earlier in the week, there are parts of that, that are a little bit iffy. But I think there are other parts of it that will be very solid.

Ross P. Gilardi - BofA Merrill Lynch, Research Division

Can you elaborate on what you're seeing in oil and gas a bit because I think that's new?

Ward J. Timken

Well, again, you got to look at the platforms that we're on. Some of the offshore stuff that we're seeing is very, very positive for us. The horizontal stuff is a little bit slow, but our belief is we'll begin to see that pick up through the year, obviously, more of a focus on oil and gas right now. The fundamental seemed to be sound, the inventories might be a little bit heavy down in Houston. But for the most part, we think they're relatively in balance. So we feel pretty good about improvement throughout the year.

Ross P. Gilardi - BofA Merrill Lynch, Research Division

And on capacity for Steel, I'm sorry if you went over some of this in the beginning of the call, we've been jumping through calls -- call to call this morning. But how much of the expected new capacity -- your own new capacity and industry capacity that's relevant for your business has come online already versus what's still on the come?

Ward J. Timken

In our case, we're -- the caster project will begin to ramp in the second half of the year. We intend to turn it on late in the second, early in the third. And that will -- we'll run that out. So you'll begin to see some of that in the fourth quarter, but not in a significant way from a capacity increase point of view. The industry in general, you've seen the start up on a number of the other facilities that would be in our space, some have gone better than others. On the whole, the industry seems to be relatively balanced based on strength in the mobile on-highway markets and again, beginning to see some growth out of the oil and gas. So in general, I would say, '13 was relatively balanced and we're keeping a very close eye on '14.

Ross P. Gilardi - BofA Merrill Lynch, Research Division

Okay. Then just lastly, I mean, should we expect a more comprehensive announcement on your capital allocation objectives over the next 3 to 5 years once the spin is completed? Obviously, you finished the year with an overfunded pension plan and your net debt is under $100 million and this is talked about every quarter. But will there be some grander communication on what you plan to do with respect to capital allocation at some point in the next, say, 6 months?

Glenn A. Eisenberg

Ross, this is Glenn. Let me address that. The answer is, one, yes, especially as we get now closer to the separation where both businesses will come out, kind of on an Analyst Day, if you will, and talk about not only their business but also their capital allocation plans. To your point, given that we've now peaked at our CapEx levels, so the expectation is that will start to come down and that the pension plans are now fully funded. More of our capital allocation will now start to go back to shareholders, if you will, dividends, share repurchases and obviously also the opportunity to do some bolt-on acquisitions. But you'll see more clarity on that as we go throughout the year.

Ross P. Gilardi - BofA Merrill Lynch, Research Division

But would -- should we naturally think of that as something that would after you've completed the spinoff that you're free to communicate on or not necessarily?

Glenn A. Eisenberg

Well, we'll obviously communicate on it each quarter as we go through. But I think once we have the Analyst Day, if you will, the separation where you now have the 2 businesses, that's another opportunity for the leaders of both of those businesses to talk about their capital allocation strategy going forward.

James W. Griffith

And we are planning that Analyst Day shortly before the separation.

Operator

And Stephen Volkmann with Jefferies has our next question.

Stephen E. Volkmann - Jefferies LLC, Research Division

Actually, I'm going to stay with the same theme, if it's okay. First, on the repatriation of cash, Glenn, you talked about the $123 million that you already got and the rest in future periods. Is that like during '14, or is that the next 10 years or something?

Glenn A. Eisenberg

Let's just say you've got the bid and the ask there, but no, most of it will be done earlier than later. We'll continue to do more this year. It's going to really be a function as well of when we need the cash in the U.S. for our capital allocation plans, but it will be spread out over some time.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay. And is the $365 million kind of it and -- or is there additional opportunities in future periods?

Glenn A. Eisenberg

Well, again, we'll have more cash overseas. The issue is we're able to bring back that $365 million at an effective tax rate of 7.3% barring other kind of tax planning strategies or the government changing their view on it, future cash would be in the normal course of, call it, the 35% rate. But we were able to at least bring back the $365 million at a very attractive rate.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay, good. And then, I guess, I'm just -- maybe this isn't as much of a question but I'm just surprised that you wouldn't have bought back a little more stock given the price had been depressed, maybe not so much today. But you sort of had a window of opportunity there and some cash coming in the door. And are you guys just sort of trying to be conservative until you get everything settled on the spin? Or is there a reason that you would have sort of held back on this?

James W. Griffith

Steve, this is Jim. Let me just sort of comment. The board is very focused on positioning the 2 new CEOs of the company to have solid balance sheets and to allow them to come out of the dock with their clear cap allocation strategy. So we're -- to use your word, we are conservative now to reserve for the 2 new CEOs to come out and share with you in somewhat different businesses what their capital allocation strategy and that is a direction that's coming from our Board of Directors.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay, that's helpful. And I guess, just a final on this one is, should we be expecting the TimkenSteel Company to provide any sort of dividend back to Timken bearing prior to the spin?

Glenn A. Eisenberg

Again, Steve, I think we've always had this kind of a guiding philosophy on the separation is that we would have 2 very attractive strong balance sheets for both companies. So we're viewing it not as the ability to dividend cash back to the company, but to make sure that both companies have strong balance sheets. So we continue to work on it and assess what the capital structure of both of the businesses will look like at the time of separation. And obviously, we'll provide you that information when it's ultimately determined.

Operator

And David Raso with ISI Group has our next question.

David Raso - ISI Group Inc., Research Division

Regarding the timing of the savings, the $25 million of annual savings, maybe I missed it. Is that 2014, you can capture the $25 million then? Or is that just a first annualized run rate?

Glenn A. Eisenberg

Yes, David, on the business cost reduction initiative, that's the one that you're speaking to, in Jim's comments, he referenced that it will be a $25 million run rate of savings, of which $20 million should -- will be impacting our 2014 results.

David Raso - ISI Group Inc., Research Division

Okay, great. And then regarding -- and again, maybe I missed this, but the separation costs, the initiatives to generate $20 million of annual savings. That's above and beyond what we just spoke about, right? It's above and beyond the $25 million?

Glenn A. Eisenberg

That's correct. We kind of viewed that the business cost reduction initiative is really reflective of the current business environment and continuing to strive to take cost out. As we look through the corporate cost reduction similarly, we know we're in the process of separating into the 2 businesses and both organizations are looking at the corporate structures that are required in how to lean and take out costs in anticipation of what we know will be new costs added to the company as we standalone a new public entity. So on the corporate side, we're looking to taking out around $20 million of costs on top of the $25 million that the business is taking out. And of the $20 million of the corporate costs, we're -- roughly around $15 million of that will be impacted in the 2014 results.

David Raso - ISI Group Inc., Research Division

All right. That's what I'm trying to think, it's a little tricky. You break the company up into 2, there's incremental corporate costs for each standalone. Is this $20 million sort of make it a neutral situation where you break up the 2 companies, but the corporate costs don't need to go up in aggregate? Is that a good way to think about it?

Glenn A. Eisenberg

That's a good way to think about it. What we've said before was that the incremental costs to the enterprise of separating into 2 public companies, the incremental cost would be roughly $25 million. The corporate cost reduction is really meant to take out and look at the 2 combined or separate companies and how can we mitigate that increase. And again, we believe we can take that around $20 million of that before the separation were to occur.

David Raso - ISI Group Inc., Research Division

All right. I guess, last question, not to front run your thoughts on analyst meeting bigger picture view, but maybe just think of it as still a combined company. The company was able to do, call it, $1.25, $1.50 EPS run rate per quarter when the commodity complex was strong. So straight into mining, a lot of big infrastructure that spins off when commodity complex is strong. With some of the restructuring actions, how you're thinking about the company broadly? And it sort of goes into, I guess, what you're going to roll up into a bigger picture view for an analyst meeting. We've lately been run rating, call it, $0.75, $0.80 a quarter. If the commodity complex doesn't really come back, say there's a weaker dynamic for a couple of years, just hypothetically, how do you think about the earnings power of the company? I guess, it's fair to say that, that run you had in late '11 and early '12 was very profitable, enjoying the commodity complex. So I'm just kind of giving you the platform here to help us a little bit how you view the run rate earnings power of the company if I didn't give you back the commodity complex being strong.

Glenn A. Eisenberg

Let me maybe take a first cut at it and see if the others want to join in. But one way to think about the performance of the company and as we look at it even this year, yes, we're operating at around 50%, 55% capacity, given that a lot of our markets are down. So as you point the one we expect to see the -- in improving markets but modestly so and we'll start to leverage on that. So as you think about kind of the trough to peak for the company, we're more towards the latter than the former. So we expect to leverage well as the markets pickup. The cost structure is in good shape, the amount of exited business that we've exited that had been less attractive in the past when we've seen stronger markets, we expect to perform much better at. So we've given you kind of our targeted, if you will, returns by the 4 operating segments as we go through the cycle and we don't envision that would change, if anything, hopefully, there's upside to that given the focus on our cost structure and the mix of our business.

David Raso - ISI Group Inc., Research Division

I wasn't sure if anybody else wanted to chime in there. I mean, that's the whole issue, right? How much do you take the cost out versus the mix inherently? It might be a little bit of a struggle the next couple of years versus that run we had when the commodity complex was strong giving you a lot of high profit margin end markets.

James W. Griffith

Dave, this is Jim. I think there's a little hesitancy to push out here because we -- as we went into the second half of 2012 and the first half of 2013, we shared with you that we saw major segments of our attractive markets going through big inventory rightsizing. And that is -- that has gone on -- I'm sorry, and we forecast it coming to an end and therefore, we gave you upside forecast from that point of view. At this point, a little bit of the hesitancy is trying to figure out how much of the market conditions that have us running at 50% to 55% capacity utilization is in fact the inherent market versus how much of it is still the overhang of inventory in some of the major segments and the lack of demand. So it's a little difficult to answer your question. I think the more general answer to your question is come back to the margin targets that we've talked about over time that -- and Rich said it, for the bearings side of the house, that Mobile and Aerospace ought to be in the low to mid-teens, that Process ought to be in the upper teens and that Steel should be in the mid-teens and potentially higher as the new capital things come on. So the -- we've now, with a relatively weaker market, got the margins right. The question in terms of trying to translate that into EPS is making an assumption of what's the fundamental demand for the products that we're serving. Not a question of mix, it's a question of fundamental demand.

David Raso - ISI Group Inc., Research Division

Well, I think that's interesting right there. I mean, you're saying even with what I would argue might be a weaker mix, you don't see a major change on how you used to view your margins to how you view them today. It sounds like a fair summary of -- we can all debate the top line. But even with an adverse mix, it doesn't seem like you're backing away from what you think inherent margins are for each business. And then, of course, the kicker is what do we do with the balance sheet, right? Obviously, you have the firepower to buyback 10% of the company pretty easily here. So okay -- but -- so the analyst meeting will give us obviously a little more clarity on all these questions.

James W. Griffith

Yes.

Operator

[Operator Instructions] We'll move on to James Kawai with SunTrust Robinson Humphrey.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

I just want to dig into organic growth on the process side. Could you kind of break out acquisitions there within the 7% to 12% growth that you're forecasting for the year? And then one of your competitors early in the week, on their call, kind of flagged improving trends within distribution. And I was just wondering if you're starting to see the front end of that as well.

Christopher A. Coughlin

Okay. James, this is Chris. Yes, 2% is the acquisition for '14 is what's in that number. So on the Process side, moving forward, we very clearly are seeing improved order intake rates within the original equipment space. This is primarily in power transmission and wind energy segments are driving that. So that's very clearly happening. The second thing is within distribution, it's very clear that the North America market has bottomed and we are cautiously optimistic that the income and order rates are going to strengthen from this point. The only thing we have out there that's concerning us is some of the emerging markets, primarily around distribution with the currency and political stuff that's going on in places in Latin America and obviously, in the other emerging markets in ASEAN, et cetera, there's some concern there, distributors tend to freeze up when those kind of events are going on. So we have to watch that carefully. But the trend lines in our major groups, for lack of a better term, are clearly more favorable than unfavorable.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

Got you. And then on the Mobile side, the 3% to 8% decline, it seems like when you strip out the 6% or 7% headwind from program exits you're looking at plus or minus 2% to 3% probably with some downside in mining and upside in auto. Is that kind of a fair look at that?

Christopher A. Coughlin

Pretty much. The organic side of that is about 3% to 4% increase. To your point, it's the exited automotive program that's driving the total. So yes, I think you pretty much had it. On the Mobile side, mining is, obviously, still a significant problem for us. But other segments, such as rail and others, are doing pretty well.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

And then finally on the Steel side, I was just wondering how much of the Faircrest continuous cash or upgrade is baked into the numbers? And I'm kind of interested on the cost side. I know that project's been characterized as kind of $200 million investment with a 15% to 20% IRR with half of it coming from costs, so implies a pretty good kind of earnings kicker just from the cost side. And I'm wondering, is the ramp going to be somewhat -- mute that gain in this year? Or can we kind of expect some accretion this year with much more next year?

Ward J. Timken

James, this is Tim. As I said earlier, our ramp on that facility is third -- late third, early fourth quarter. So the impact on 2014, from a revenue and profitability point of view, is going to be relatively minor. When that facility is up and running at full capacity, it will have a significant impact. You probably won't see a lot of it in the back end of the next year or this year though.

James Kawai - SunTrust Robinson Humphrey, Inc., Research Division

All right. But pretty much the full or a good chunk of the benefit in '15?

Ward J. Timken

You'll begin to see it, yes, really come on in '15.

Operator

And we'll move on to Stanley Elliott with Stifel.

Stanley S. Elliott - Stifel, Nicolaus & Company, Incorporated, Research Division

My question has been answered.

Operator

[Operator Instructions] And gentlemen, there are no further questions. I will turn the conference back to you all for closing remarks.

James W. Griffith

Well, thank you again for your interest in the Timken Company and your patience as we attempt to describe to you the many moving pieces going on within our company. Bottom line, the company is well positioned going into 2014 and we expect a good year. Thank you.

Operator

And that will conclude today's conference. Again, we thank you all for joining us.

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