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Timken Co. (NYSE:TKR)

Q1 2012 Results Earnings Call

April 25, 2012 9:00 AM ET

Executives

Steve Tschiegg – Director, Capital Markets and Investor Relations

Jim Griffith – President and CEO

Glenn Eisenberg – Executive Vice President, Finance and Administration and CFO

Rich Kyle – President, Mobile and Aerospace and Defense Businesses

Chris Coughlin – President, Process Industries

Sal Miraglia – President, Steel Group

Analysts

Stephen Volkmann – Jefferies

Eli Lustgarten – Longbow

Andrew Obin – Bank of America-Merrill Lynch

Gary Farber – CL King

David Raso – ISI Group

Tom Mullarkey – Morningstar

Steve Barger – KeyBanc

Holden Lewis – BB&T

Operator

Good morning. My name is [Tunisia], and I will be your conference operator today. At this time, I would like to welcome everyone to Timken’s First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Tschiegg, you may begin your conference.

Steve Tschiegg

Thank you. And welcome to our first quarter 2012 conference call. I’m Steve Tschiegg, Director of Capital Markets and Investor Relations. Should you have further questions after our call, please feel free to contact me at 330-471-7446.

Before we begin our call, I wanted to point out that we posted to the company’s website this morning presentation materials to supplement our review of the quarter results as part of this earning teleconference call. This material is also accessible from download feature from our earnings call webcast link.

With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration, and CFO; Rich Kyle, President of our Mobile and Aerospace and Defense businesses; Chris Coughlin, President of Process Industries; and Sal Miraglia, President of our Steel Group.

We have remarks this morning from Jim and Glenn, and then we’ll all be available for Q&A. At that time, I’d ask that you please limit your questions to one question and one follow-up at a time to allow an opportunity for everyone to participate.

Before we begin, I’d like to remind you that during our conversation 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. These factors are described in greater detail in today’s press release and in our reports filed with the SEC, which are available on our website www.timken.com.

Reconciliations between GAAP and non-GAAP financial information are included as a part of the press release. This 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.

Jim Griffith

Thanks, Steve, and good morning. By now you’ve seen our earnings release and know that our results for the first quarter were exception. Sales were up 13% to $1.4 billion and we generated income of a $1.58 per diluted share.

Both I’m proud to note, our new records for the company, not just for this quarter, but for any previous quarter in our history. We leveraged 40% of sales increased to the bottom line demonstrating strong execution and providing a terrific start to the year. Our efforts were void by momentum in the marketplace.

In North America, we saw continued strengthening across most of the markets we serve with notable increases in the oil and gas, and off-highway sectors. Our European business saw improved sales in the quarter driven by demand in industrial aftermarket.

Sales in Asia were down in line with expectations as we saw heavy capital goods and wind energy demand softened from the robust year ago levels. We expect demand in Asia to pick up as the year unfolds.

The results we continued to deliver stand as evidence that we have fundamentally changed the structure of our business. Strategically, we have repositioned our product and services portfolio, reoriented toward those applications and markets for our know-how significant value to our customers that includes the critical market of energy, mining and infrastructure development.

We’ve expanded existing product lines which are resonating well in the market. For example, we redesigned and launched the adapt bearing that brings together the benefit of several bearing types thanks to Timken proprietary design.

We have acquired adjacent product lines including the Philadelphia Gear products and services and with our Drives acquisition added roller and engineer chain. Both of these businesses are performing very well and we’re pleased with their progress.

We focused on geographies for our strong brand and reputation for increasing reliability our opening doors. These changes are creating additional opportunities to invest for growth and operational efficiencies.

Just two days ago, we broke ground on $225 million investment in our Faircrest Steel Plant. This will improve the productivity and yield of the steel business, and increase our ability to serve demand for the oil and gas, and industrial markets.

Our first quarter results exceeded expectations, we’re on pace to achieve another record year. I shared a bit about how our strategy is driving our performance that coupled with a current market conditions lead us to increase our forecast in full year earnings estimate.

We see strengthening demand from energy, mining and rail markets, as well as global industrial after market. We’re enjoying increased sales from new products and recent acquisitions, and welcome the signs of recovery in our aerospace business.

Glenn will offer a more thorough review of our results and financial outlook. So let me turn the meeting over to him.

Glenn Eisenberg

Okay. Thank you, Jim. Sales for first quarter were $1.4 billion, an increase of $167 million or 13% over 2011. The increase was due to strong volume across the company’s broad end markets, which was partially offset by exited business within mobile industrial segment. In addition, the topline benefited from higher pricing and mix, as well as acquisitions, excluding acquisitions sales were up 8%.

Gross profit of $412 million was up $78 million from a year ago. The improvement was driven by higher volume, acquisitions, pricing, mix and surcharges, which was partially offset by higher material costs. The gross margin of 29% for the quarter was up 240 basis points over a year ago.

For the quarter SG&A was $165 million, up $14 million from last year, primarily reflecting acquisitions, as well as increased discretionary spending. SG&A was 11.6% of sales, an improvement of 40 basis points over last year, as we continue to effectively leverage our cost structure.

During quarter, the company revised its SG&A allocation methodology to better reflect the use of shared resources among its business segments. Although, the impact was small, 2011 segment results have been revised which provides for better year-over-year comparisons.

EBIT for quarter came in at $245 million or 17.3% of sales, 300 basis points higher than last year. Net interest expense was $7.9 million for the quarter, was down slightly from last year, primarily due to lower financing costs.

The tax rate for the quarter was 34.3%, slightly higher than first quarter of 2011 and in line with our full year expected tax rate of 34%. As a result, income from continuing operations for the quarter was $156 million or a $1.58 per diluted share, compared to $1.13 per share last year.

Now, I will review our business segment performance. Mobile industry sales for the quarter were $469 million, up 6% from a year ago. The increase was driven by higher demand lead by off-highway and rail sectors, which was partially offset by exited business. In addition, the topline benefited from the Drives acquisition. Excluding acquisitions, sales were up 1%.

The Mobile segment had EBIT of $87 million or 18.5% of sales, compared to $72 million or 16.3% of sales last year. The favorable impact of stronger volume and improved manufacturing and logistics cost were partially offset by higher selling and administrative costs.

Mobile industry sales for 2012 are expected to be flat up 5% driven by improved demand from off-highway, rail and the automotive aftermarket sectors, as well as impact of Drives acquisition. This growth is expected to be partially offset by lower vehicle sales -- lower light vehicle sales, resulting from company strategy of focusing on markets which offer long-term attractive returns.

Process Industries sales for the first quarter were $356 million, up 25% from a year ago, driven by stronger demand from industrial distribution and the impact of acquisition, as well as pricing, partially offset by lower wind energy sales. Excluding acquisitions, sales would have been up 10%.

For the quarter Process Industries EBIT was $82 million or 23.1% of sales, up from $65 million or 22.9% of sales last year. EBIT benefited from higher volume, pricing and acquisitions, partially offset by higher selling and administrative costs.

Process Industries sales for 2012 are expected to be up 10% to 15% for the year driven by global industrial market demand, new product sales and the full year benefit of acquisitions.

Aerospace and Defense sales for first quarter were $91 million, up 15% from a year ago. Higher demand lead by Defense and motion control sectors contributed to most of the increase. EBIT for quarter was $11 million or 11.7% of sales, up from $1.6 million or 2% of sales a year ago.

The improved profitability was due to higher volume and lower selling and administrative costs. For 2012, we anticipate aerospace and defense sales to be up 10% to 15%, primarily driven by stronger defense and civil aerospace markets.

Steel sales of $536 million for the quarter were up 11% over last year. The increase was primarily driven by favorable pricing and higher demand from the oil and gas markets, partially offset by lower shipments to the industrial and mobile and highway sectors. Surcharges were up approximately $5 million for the quarter due to higher raw material costs.

EBIT for the quarter was $88 million or 16.4% of sales, compared to $59 million or 12.3% of sales last year. The increase resulted from improved pricing and favorable mix, which was partially offset by lower volume, higher material costs and a one-time expense related to completing a new five-year labor agreement with the United Steelworkers of America.

Steel segment sales for 2012 are expected to be up 5% to 10%, driven by end market demand in the oil and gas markets and pricing.

Looking at our balance sheet, we ended the quarter with cash of $359 million and net debt of $146 million, compared to net debt of $47 million at the end of last year. The change in net debt includes the company’s discretionary pension contributions of $62 million net of tax. The company ended the quarter with liquidity of $1.2 billion with no significant debt maturities until 2014.

Operating cash flow for the quarter was use of $39 million, reflecting the company’s strong earnings, which were more than offset by increased working capital to support the company’s growth and discretionary pension contributions.

Free cash flow for quarter was use of $107 million, after capital expenditures of $46 million and dividends of $23 million. Free cash flow excluding the discretionary pension contributions was use of $45 million.

Turning to our outlook for the year, sales are projected to be up approximately 7% to 10% over 2011, an increase from our previous range of 5% to 8%. Our earnings per diluted share for 2012 are now expected to be $6.10 to $6.40, reflecting an increase of a $1.20 per share over our prior estimate, $0.50 of the increase is due to improved operating performance with the remaining $0.70 from anticipated proceeds from the Continued Dumping and Subsidy Offset Act or CDO.

The expected CDO receipts are from antidumping duties collected but not distributed by U.S. customs that relate to imports from prior years. These one-time distributions are only expected to impact the second quarter.

The company expects cash from operating activities to be $565 million. This includes discretionary pension and VEBA trust contributions totaling $220 million net of tax and the benefit of CDO payments totaling approximately $70 million net of tax. The company has increased its expected pension contributions by the amount of its anticipated CDO receipts.

Free cash flow is expected to be $140 million after capital expenditures of $335 million and dividends of roughly $90 million. Excluding discretionary pension and VEBA trust contributions, as well as the CDO receipts, free cash flow is now expected to be $290 million.

This ends our formal remarks and we’ll now be happy to answer any questions that you have. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Stephen Volkmann of Jefferies. Your question please.

Stephen Volkmann – Jefferies

Hi. Good morning.

Jim Griffith

Good morning.

Glenn Eisenberg

Good morning.

Stephen Volkmann – Jefferies

This job keeps you humble I guess when you -- when my forecast missed what you did by so much. So, I guess, I’m just trying to get my head around kind of what’s possible here. So maybe my first question is, if you just annualize the first quarter, you’re going to get something well north of $6 for this year excluding CDSOA payments and yet you’re not quite there. So, I guess, I’m wondering if you feel there is something that’s either decelerating or was pulled into the first quarter, normally your second and third quarters are stronger than the first. And so, I guess, I’m trying to figure out how I should think about the year kind of progressing here?

Glenn Eisenberg

Good morning Steve. Obviously, there are a lot of factors that come into play with the strength that we had in the first quarter and then obviously throughout the rest of the year. And it varies by each of the different segments. So, what I may do is just have Chris, Rich and Sal each go through a little bit of the trend in their business to give you some of that color.

Chris Coughlin

Yeah. This is Chris Coughlin. So, I’ll be talking about process. First quarter was obviously very good. Distribution mix remained favorable. North America was very strong. Our new products are continuing to do very well in the market.

The further point on that is the acquisitions have integrated very well. Obviously, you can see that in the margins with sales growth. So generally speaking, the first quarter was excellent.

For the balance of the year, we see a very good year, and what I would guide you on is margins comparable to last year, to the first three quarters should be pretty good. And we’ll see the typical seasonal weakness in the fourth quarter.

Rich Kyle

This is Rich Kyle, Mobile. I’ll talk a little bit about the margins and the drivers there. Coming into the year, we expected margins to be slightly down for mobile driven by the exited business in the light vehicle OEM segment. Now, we’re modeling that to be flat to slightly up for the year.

Some of the drivers there on the volume side, three of our four OEM markets are pretty strong right now, mining, rail, agriculture are all very strong. Light vehicle year-over-year is good. The only one that’s a little soft right now is heavy truck and it’s holding up, but not growing year-over-year. So the outlook for -- on the volume side looks good.

From a mix standpoint as I said, coming into the year, we expected that we would have some stranded costs from the exited business and the mix work a little against us. It is actually working favorably, and we expect that mix help to continue through the year and that the markets are strong will help that mix. Our execution was strong in the first quarter both in the market and plants. We expect that to continue.

You’ll recall from the full year guidance. Glenn had given guidance last quarter that we expected about $0.10 a share of restructuring cost for the full year. All that $0.10 sits in mobile. We took none of that in the first quarter. We do still expect that to take place so that would bring the margins down somewhat in the balance of the year within Mobile.

Chris Coughlin

And then within Mobile, we would also expect normal seasonality, which first half would typically be 1 to 200 basis points higher than the second half. So given slight margin improvements for the full year but don’t expect certainly to hold 18% level for full year either.

On the Aerospace side, talk about the three big drivers there. First on the volume side, we have -- had for seven quarters been running 80-ish million dollars a quarter and had been stuck on that for a while. We got that up to $90 million in the first quarter this year. We expect to hold that essentially for the rest of the year.

So we don’t have modeled strong sequential growth but with the 90-ish million dollars that gives us solidly into that 10% to 15% year-over-year. So the volume side looks positive.

From an execution standpoint, both from the market and in the plants improved significantly towards the latter half of last year and into the first quarter of this year. Combined with the volume, we saw the benefit of that. We expect that to hold and to continue through the course of the year and actually build on that.

Third element would be mix within Aerospace. And we did have an unusually favorable mix in the first quarter that we would not expect to continue to repeat. So the sum of that is we were targeting roughly double-digit EBIT margins for the rest of the year in Aerospace.

Sal Miraglia

Yeah. Stephen, this is Sal Miraglia. First of all the Steel business usually has a stronger first half than second half anyway. We have maintenance costs which sort of dampened our profitability in the third quarter. And we have regular seasonal holiday issues in the fourth quarter. So this is not at all unforeseen or unfelt or unperformed in the past as we see it.

As we speak to our customers, there is no expectation of seeing any kind of lack of demand. So the end-use requirements still look very strong, very solid. Fundamentals are exceptionally good. Having said that, there were three things that occurred that I think will see a bit of an easing in terms of the demand that we’ve had.

First of all, throughout the end of 2010 and all of last year as customers attempted to restock as well as meet the resurrecting demand, everybody wanted everything all at once and everyone has been very busy. I think you can appreciate if you follow any of the SPQ markets how tight the supply situation has been.

And we did a lot negotiating with customers to try to ease back on that. So we could restore customer service levels to a very strong level, the way we have normally operated, with reliable lead-times and reliable on-time deliveries and we got there. In fact, we operated that way in the first quarter. So that was one issue that I think is behind us, and we expect to stay there without holding our assets by any stretch.

Now, there are two other issues though that I think will have a very short period of adjustment that will need to be dealt with. It may have a slight dampening effect on the second quarter but not bad at all. The first is that when the customers restocked a number of them overshot the inventory targets they had.

So that will need to be mitigated. And that very tight supply throughout the whole industry, it attracted imports and imports have landed. And that will need to be mitigated as that inventory amount finds homes for some place. But having said all that, we don’t expect the business level to diminish very much at all.

We expect it to be pretty solid over the course of the year, very comparable to what our first quarter was with just those seasonal issues. And most of that’s built into the guidance that we have given.

Stephen Volkmann – Jefferies

Great. Sorry. That’s very helpful. All you guys, I appreciate that. And maybe just a quick follow up, Sal. Just, you mentioned some costs on your five-year labor agreement in the quarter. I assume those are one-time. How much roughly were those?

Sal Miraglia

About $5 million, and it was basically a signing bonus for the ratification of the contract in the first quarter.

Stephen Volkmann – Jefferies

Great. I will pass it on. Thanks guys.

Jim Griffith

Thanks, Stephen.

Operator

Thank you. Our next question is from Eli Lustgarten of Longbow. Your question please.

Eli Lustgarten – Longbow

Good morning. Congratulations on the quarter.

Jim Griffith

Good morning.

Glenn Eisenberg

Thanks Eli.

Eli Lustgarten – Longbow

Can we talk about -- when you look at the mix of demand, it was like North America was fine and everything else was somewhat soft or weakening. Can we talk a bit what you are seeing as we go through the rest of the year on that?

I mean, the implications that you expect U.S. to hold up, North America to hold up, but there is some question whether Europe or China or any of those markets get better and what timeframe? Can you give us an idea of what you are seeing, what you expect and some color of what’s going on?

Chris Coughlin

Yeah. Eli, this is Chris. So let’s start with Asia. Obviously, the first quarter and I think we had given previous indications that we were concerned about the first quarter. That pretty much played out the way we expected. It was -- we were down single-digit in revenue. Primarily, though the weakness was in very targeted markets, particularly Wind and actually in Rail a little bit in China.

So what we anticipate is going to happen is we anticipate to see a gradual recovery through the balance of the year. So we expect the Asia situation to improve as we go deeper into the year. And so that’s basically our view point on Asia. But we do not expect to be going back to the robust growth of the past three or four years. It will be a gradual recovery.

On Europe, I think it’s important to remember that we are not a big player in the European automotive industry. Our European business is doing pretty well on the distribution side. So it’s doing a little bit better than we would have expected. But in total for the company, I think you can see the data that that we are up low-single digits in total. So that’s basically what we -- two geographic areas.

Eli Lustgarten – Longbow

You expect Europe to show positive numbers for the rest of the year?

Chris Coughlin

Definitely, we expect to have positive numbers in Asia and in Europe in distribution, yes. I will let Rich comment on European heavy truck which would be the other part of Europe where we have exposure.

Rich Kyle

Yeah. We’re down slightly by year-to-date on highway vehicles in Europe. And it’s bringing down the -- some of the growth in the other segments and we have that built into the model to approximately continue along those lines for rest of the year.

Eli Lustgarten – Longbow

And as we look at -- I mean -- we still have a pretty decent range between 540 and 570 ex the CDOS gain. Is it almost the difference between the top and bottom of their range really based on what you see happening outside of the U.S.? I mean what gives the sensitivity of that nature at this point, particularly, at the strength of the first quarter?

Glenn Eisenberg

Eli, I think we would agree with that. I mean, ultimately where we are in the year, there are questions always over end market demand. We have good sense of where our customers are now, what our good backlog is and business. But obviously there is uncertainty with that and therefore the plus and minus would be more driven off of margin than it would be on execution or margin or pricing.

Eli Lustgarten – Longbow

Yeah. Any place where pricing is becoming a little more difficult to hold or push through or sell, I think Sal indicated in steel a little bit. You might have a little bit of an issue because of the imports. Can you go through how pricing is holding up across the businesses?

Rich Kyle

Let me start with that, Eli, given the point you made. We actually don’t expect to see structural pricing very highly pressured from the inventory, part of that inventory or the customers’ own over shoots and the other part is imports. There will be some but for the most part that goes at the lower end of what requirements are there. We’ve actually been pretty successful as we negotiated last year to get reasonable price increases and we expect that to hold for the year.

Chris Coughlin

Yeah. Eli. Hi, this is Chris. On the bearing side, pricing is okay. Obviously, the distribution side of that you’re well aware of. And we’ll be -- we normally deal with distribution pricing starting in June. And so we will follow that pattern again this year. And generally speaking for the most part, our pricing is okay.

Eli Lustgarten – Longbow

Thank you.

Chris Coughlin

Thanks, Eli.

Operator

Thank you. Our next question is from Andrew Obin of Bank of America-Merrill Lynch. Your question please.

Andrew Obin – Bank of America-Merrill Lynch

Hi. Yeah. Good morning guys.

Glenn Eisenberg

Good morning.

Andrew Obin – Bank of America-Merrill Lynch

Just a question on steel. I guess going back to the fall, I thought you guys were pretty well sold out for the year going into 2012. So I’m just wondering where does all this uncertainty about restocking come from?

Jim Griffith

Well, to be honest, Andrew I think what we said is that we were on allocation. And therefore the visibility was about a three-month window. We have remained on allocation that we call it more controlled order entry in order to avoid getting over committed. We negotiated with customers to reduce the intensity of their demand on us so that we could restore service levels.

As you know in our industry, some of the lead times had gone out for some mills as long as a year which is really unworkable. We now have quite reasonable lead times, very good on-time delivery and we’re operating at pretty high levels at the current time. So we’re pretty comfortable with that. Where our uncertainty is, is how long will it take to overshoot on inventories by customers and the inventory from imports to find its home and settle down in the market. And so that just puts a bit of uncertainty, because we can’t predict with perfection how long that will take.

Andrew Obin – Bank of America-Merrill Lynch

Right. But I just go back, I mean, I think historically if I remember you would, by October, we sign contracts on two-thirds of the business. And my understanding is if I recall correctly that this year the number was substantially higher. And so I would just go back -- going back to October, November, how much of your capacity have you guys pre-sold and is what’s going on -- are we talking about marginal business? Are we going back and readjusting core contracts with customers?

Jim Griffith

Well, the predominant thing that we do when we have those contracts is agree on price. And we get an -- what the demand volume will be. Those are all in place. What was unknown at the time by the customers as well as us was how quickly they would restore what their pipeline inventories were.

And so now they were at that point. They have completed that. There was a bit -- they’ve put a bit more in place than not. And so it’s the contract business that we’ll see sort of moderating as we go through this period of inventory adjustment. And having said that, we’re expecting to operate at very high levels within our business. This is not -- this is simply easing away from running at the wall, so to speak, and giving us breathing space.

In fact, its quite -- we feel much healthier about it as it pertains now, because we have the opportunity in fact to do the proper kind of maintenance within our operations.

Andrew Obin – Bank of America-Merrill Lynch

So is -- when you talk about lower capacity utilization in Q1, was -- they are just taking some downtime for maintenance that you haven’t taken in Q4?

Sal Miraglia

Yes.

Andrew Obin – Bank of America-Merrill Lynch

Is that how I should be thinking about it?

Sal Miraglia

That’s exactly how you should think about that. That’s correct.

Andrew Obin – Bank of America-Merrill Lynch

And that will be completed by the end of the quarter and we’ll go back to normal in the second quarter?

Sal Miraglia

Except – with the inventory that needs to find its way. That -- and we’ll have big maintenance expenses in the third quarter, that’s our traditional time period. But there are -- we try to spread these things out throughout the course of the year. We ran the first quarter close to 90% of capacity which is about full if you look at the issues associated with reliability in any particular industry.

Andrew Obin – Bank of America-Merrill Lynch

Well, I won’t take more of your time. Thank you for a fantastic quarter. Thanks a lot.

Sal Miraglia

Thanks, Andrew.

Glenn Eisenberg

Andrew, let me just do a follow-up on what Sal said, so you make sure, because I wasn’t sure by your response you understood what he was saying. Sal took a very conscious decision going into 2012 to improve our level of customer service and that involves a conscious decision not to book the facility at 100% and that’s kind of what he is saying. All the details of how you do the contracts and inventory adjustments were based on a conscious decision to improve our customer service and therefore creating more stable operating environment.

Andrew Obin – Bank of America-Merrill Lynch

Now that makes sense. Thank you so much.

Operator

Thank you. Our next question is from Gary Farber of CL King. Your question please.

Gary Farber – CL King

Good morning. Can you just talk about how you think about your liquidity, bought back some shares in the quarter and how you see the market for acquisitions?

Glenn Eisenberg

Obviously, we talked about having around $1.2 billion of liquidity. So we have a strong balance sheet. We have cash on hand. We have been in the market repurchasing some shares as part of our normal buyback program. We’re looking obviously continue to reallocate some of our capital to acquisitions.

We think the market frankly has been improving as far as the dynamics. We’re seeing just a lot more deal flow. I think that’s general to most industries but even for us what we’re looking at. So you’ve got a situation of improved earnings outlook. So, companies more are looking as a good time to be potential sellers. You’ve got strategics with cash and strong balance sheets. You’ve got even financial players that obviously can access capital and low cost of capital.

So, all the dynamics show that we’ll see a lot of deal activity. Again, hopefully we’ll be a participant in that successfully which is part of our strategic objectives, and obviously we’ll talk more about that as we hopefully execute on those plans and talk about the acquisitions that we’ve been able to do.

Gary Farber – CL King

Okay. Thanks.

Operator

Thank you. Our next question is from David Raso with ISI Group. Your question please.

David Raso – ISI Group

If I heard you correctly, the first quarter growth ex the acquisition was 10%. And the full year growth from acquisitions alone is about 7%. So really you have a full-year guidance for core up three to eight. But again, we just did first quarter core up 10.

Glenn Eisenberg

Let’s…

David Raso – ISI Group

So again first quarter was up 10 ex-acquisitions, full year ex-acquisitions only three to eight.

Glenn Eisenberg

Let’s start the numbers for the first quarter performance, we were up 13% as a company. Acquisitions accounted...

David Raso – ISI Group

No, I thought – I’m sorry, just process industries. I apologize.

Glenn Eisenberg

Yeah. Okay. Go ahead.

David Raso – ISI Group

So process industries again, ex-acquisitions up 10 for the quarter.

Glenn Eisenberg

Correct.

David Raso – ISI Group

Full year and I calculate your acquisitions will add about 7%, 7.5%.

Glenn Eisenberg

Yes.

David Raso – ISI Group

That means the full year core is only three to eight, 2.5 to 7.5. So the idea is why are we slowing that much? If this is of all your businesses that obviously have the Asian and European exposure and you feel the Asian, at least the comps get a little bit easier. Unless you think it gets worse, why are we having such a slowdown in core growth and process? You would have thought the Asian and European numbers might be as bad as they get in the first half.

Glenn Eisenberg

Let me at least do the acquisitions little high on and then Chris can talk, color on the markets. But we would say again based on the timing of the acquisitions that were done with still the year being the larger one in the beginning of the third quarter and drives smaller one in the fourth quarter. We’re looking at acquisitions call it around 5%, 6% relative to the 10% to 15%.

So we truly are looking at call it plus or minus a double-digit 10% potential, if you look at the upper end of the range for sales growth within process. But Chris, maybe some color on the market.

Chris Coughlin

Yeah. What’s driving your math is first of all on the OE side, we have certain market spaces that are definitely down. Wind is one of them, and we do not expect to see a huge recovery for the balance of the year. So year-on-year, we’re beginning to hit there. We continue to see weakness in Asia which concerns us, although we are forecasting a recovery there.

We are exposed to the capital equipment building in Asia. And so we are tempering that forecast a little bit. Once again, we expect it to recover, but we are cautious about that. And I would also highlight, we raised that issue with you six months ago and it turns out that our cautiousness about it was relatively on. And so that’s basically what’s driving that and there is couple other segments bouncing around. But it’s primarily a weakness on the OE side.

David Raso – ISI Group

Well, I’m just trying to figure out, that’s still forecasting slower growth the next three quarters and somewhat notably on the core business. Is the Wind business year-over-year still getting worse? Is Asia still getting worse year-over-year or is it a slow down in North America? I’m just trying to figure out if the year-over-year is as bad as it gets first quarter potential, maybe I’m wrong. I’m just trying to read what you are saying not what I think.

Jim Griffith

Yeah. Well, the business last year ramped. Okay, across the year. So that weakness, as you look on the comparable quarter to quarter to quarter gets worse if you want to use that.

The other issue and now you are down into a lot of things, a lot of detail. There is a lot of lumpiness in the Philadelphia Gear revenue stream and there is a lot of reasons for that. So that revenue in the balance of the year will be significantly lower than what it is in the first quarter and that’s got to do with the lumpiness of revenue streams with contracts, et cetera.

In summary, once again, we can plug in any assumptions that we all have on it. Our revenue for the balance of the year on the core organic is heavily dependent on what you believe is going to happen in Asia. So there is your point to zero in on if you want to model it one way or another.

David Raso – ISI Group

That sound a swing in the range of the revenue essentially, the revenue range for the year. Okay.

Glenn Eisenberg

If you exclude the acquisition growth, you’re looking on the upper end of the range around 10%. So that be consistent with the growth year-over-year we saw in the first quarter. And then as Chris says, we have some down side on that based on what’s going on in Asia. So potentially that could get us lower in that range. But if Asia holds up as it could be, we could be at that 10% click per year-over-year.

David Raso – ISI Group

All right. Terrific. Thank you very much.

Operator

Thank you. Our next question is from Tom Mullarkey of Morningstar. Your question please.

Tom Mullarkey – Morningstar

Good morning, guys. Congratulations on the quarter.

Glenn Eisenberg

Good morning.

Jim Griffith

Good morning.

Tom Mullarkey – Morningstar

The CDSOA payments were significantly higher than they’ve been in many years. What years was the recovery for actually that you are going to be getting during 2012 here? And would you expect any larger receipts for 2013 or 2014 as well?

Jim Griffith

Yeah. Tom, you’re correct obviously. This was really a pent-up issue that the customs had received that the tariffs if you will over the years call it six, seven, and eight would have been primary periods little bit from call it nine and ten. But based upon historical periods instead of freeing up those funds each year, if you will, and distributing, they held that just because it was being challenged and so forth.

So we just received notification and then obviously, the receipts started coming in that what they had withheld is now being distributed. So we truly believe this. And we’ve always accounted for this way but as a one-time item that should impact just the second quarter.

Going forward, there is the potential that some additional funds could come our way, but we would expect that to be very nominal more inline with what we maybe have seen over the last couple of years, but nothing from a material standpoint and clearly, nothing near what we have received currently or in the quarter.

Tom Mullarkey – Morningstar

Okay. Great. Thanks. And on your upsize share repurchase program which lasts the next four years for 10 million shares. Do you have any expectation for the pace of purchase? Will you be more opportunistic if the price is what you deem to be low or will be evenly spread out?

Glenn Eisenberg

I think from our standpoint of the 10 million shares again over the four years, we repurchased 0.5 million in the first quarter. Our view at least the last couple of years has been to offset any delusion from shares for remuneration purposes. So that would be around 1 million shares a year. What we’re looking at, at least is potentially for the first half to repurchase again that 1 million shares that we’re committed to. Again, let’s say the current pricing we’re always subject to what the price is, but I believe we will execute that.

Then for the remainder of the year, we’ll relative to other capital allocation opportunities so to the extent acquisitions are there. We may be less on the buyback to the extent that they’re not. We may start tapping into that 10 million program more than what we would have in the last couple years. So yes, it’s opportunistic, but it’s also based upon where we feel we can best redeploy our capital.

Tom Mullarkey – Morningstar

Thanks, guys.

Operator

Thank you. (Operator Instructions) Our next question is from Steve Barger of KeyBanc. Your question, please.

Steve Barger – KeyBanc

Good morning. I wanted to go back to the steel, if I can real quick. You said lead times have become more manageable if I heard it right. But did you quantify where lead times are now versus where they were for large and small SBQ?

Jim Griffith

No. I didn’t. Would you like me to?

Steve Barger – KeyBanc

I would love it.

Jim Griffith

Okay. First of all, appreciate the fact that you need to have a piece of allocation before the lead time means anything to you under these circumstances. And we’re only allowing orders to be entered one quarter in advance. So every month that goes by, we will now take another order or month’s worth of orders about one quarter away.

For our small bar product lines, for relatively simple products more hot roll without any further processing, we’re probably inside of that window. We could maneuver within a six-week period to respond to customer’s demand. So we’ve got that kind of flexibility.

With our large bar product, it’s more like five weeks. So we’ve got that kind of maneuverability. It’s not that the order book isn’t there but we’ve got enough room to be able to adjust to customers changing needs as their requirements are there. If you don’t have any allocations, it’s 16 weeks. So it’s out four months and then we’ll be very careful not to over commit if in fact, we’ve got other customer contracts that might otherwise consume the capacity of a particular product stream.

Steve Barger – KeyBanc

And how has that 16 weeks changed? Has that come in quite a bit from where it was six months ago or has that been consistent?

Jim Griffith

Well, let me just -- let me quote what the industry as a whole sees in the way of that range. Some of our competitors are still on a one-year lead time. So that’s pretty strong, pretty far out. That’s in some of the smaller bar products, particularly those that are serving the, sort of, resurging automotive market. Some of our other competitors are in the comparable 12 to 16-week range.

So that’s where they are today. Prior to this, it was anywhere from six months to a year plus during -- throughout the entire year last year.

Steve Barger – KeyBanc

That’s great color. Thank you. And sorry if I missed this, but did you or will you say how big the steel labor agreement expense was?

Glenn Eisenberg

Well, we did say it was a $5 million one-time expense, which was a signing bonus in the first quarter.

Steve Barger – KeyBanc

Okay. Got it. Shifting to more of the Phili Gear and Drives, very nice contribution it looks likes in the quarter, can you tell us how the customer reaction has been to the cross-selling initiatives and to the idea of increasing content in the power transmission market? I mean how has that been received? And do you have enough bench, I guess to serve all the customers that you need to right now?

Sal Miraglia

Yeah. It’s going fine. We’re dealing with both the end-users and distribution channels depending on the specifics of which product we’re talking about. So, it’s going very well. And we’re in the process of globalizing some of those platforms. And I think you can see from the margins, obviously, the businesses are performing very well. So that’s about -- Rich, you might want to comment on drives because that’s a big agriculture play.

Rich Kyle

It’s -- integration has gone well. The Ag market is pretty strong. And I’m pleased with the performance so far of the acquisition.

Steve Barger – KeyBanc

Okay. And you’ve talked about some of the specific end markets but can you frame-up construction equipment versus mining equipment as one significantly stronger than the other right now? And just how are you thinking about those specific verticals as you go through the year?

Rich Kyle

Yeah. This is Rich. Definitely mining is considerably stronger than construction. And we expect that largely to continue throughout the remainder of 2012.

Steve Barger – KeyBanc

Thanks very much. I’ll get back in line.

Operator

Thank you. Our next question is from Holden Lewis of BB&T. Your question please.

Holden Lewis – BB&T

Thank you. Good morning.

Jim Griffith

Good morning.

Sal Miraglia

Good morning.

Holden Lewis – BB&T

On the pricing question, one of your big competitors, sort of, made pretty explicit what they were doing and when with pricing. Do you have a sense of -- I mean, is that something that you intend to sort of follow in terms of magnitude and timing? And give us a sense on the cost side because it seems like costs are generally reasonably tame right now. Is any pricing you seem intent on going to get, is that going to be something which is truly beneficial to the margin or an offset to something?

Chris Coughlin

This is Chris. Let me start with distribution. We follow a calendar every year with regards to pricing around the world. For instance, in the United States that is in June. Europe would be following later. So we have a very set calendar of that we use around the pricing and we will stick with that calendar again this year. So that will be the balance of the year. And we have not formally publicized what we are going do or not do. So we’re working on that now. But so -- that’s that answer.

And on the cost side, costs are -- there is inflationary pressure in certain places. There is some raw material that’s coming down some in certain places. We see costs moving relatively level, is the term I would use. We do not see costs at this point being a huge problem for us but we have various issues around the world.

Holden Lewis – BB&T

Okay. I think can you give us a sense, when you talk about distribution, I’m assuming we are talking about the Bearing side specifically. But how big is that nut of revenue that’s going to be covered by the standard price increases, first and then for that which is not distribution, will you also likely have a price increase or how is that going to work?

Glenn Eisenberg

Well, once again our distribution business is pushing 1.1 billion or 1 billion these days. So all of that business is to various degrees has pricing throughout the calendar. So it applies to all of it. It does not necessarily apply to it uniformly around the world. There is -- also it’s a different issue around that. So that’s what I would answer. I would let Rich comment on the Mobile side.

Rich Kyle

Holden, this is Rich. On the Mobile and Aerospace side, as you know, we’ve moved pricing significantly in the last few years, did not move it significantly coming into 2012. Most of our pricing is negotiated either multi year or at the beginning of the year. So our pricing is largely in place. Don’t expect to move it significantly. We do have material passthrough in lot of our major contracts.

So if material moves up or down, our customers will experience that both favorably and unfavorably. And for 2012, we are more focused on holding price and managing the cost piece and getting the leverage.

Holden Lewis – BB&T

Okay. Thank you. And then on the -- in your supplementals, you talked about -- I think a 45 million drag from the volume that you walked away from on the automotive side. That obviously anniversaries to or annualizes to 180 million versus the 150. Are you seeing greater walkaways or is it just first quarter loaded and it eases up as the year progresses?

Glenn Eisenberg

The exited business played out almost exactly as we anticipated. That’s a year-over-year quarter number. So the comps changed through the courses of the year. And there is no change in our guidance there.

Holden Lewis – BB&T

Okay. Thank you.

Operator

Thank you. (Operator Instructions) There are no remaining questions at this time. I would now like to turn the conference over to Mr. Jim Griffith for any final comments or remarks.

Jim Griffith

Well, thank you again for your interest in the Timken Company. As you can hear, we’re rightfully proud of the structural changes we’ve made and the impact they had on our performance this year -- this quarter. We look forward to talking to you in the months ahead. Thank you.

Operator

Thank you for participating in today’s Timken’s first quarter earnings release conference call. You may now disconnect.

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