Jason Hershiser - The Timken Co. Richard G. Kyle - The Timken Co. Philip D. Fracassa - The Timken Co..

Eli Lustgarten - Longbow Research LLC David Raso - Evercore ISI Group Stanley Elliott - Stifel, Nicolaus & Co., Inc. Samuel H. Eisner - Goldman Sachs & Co. Joseph John O'Dea - Vertical Research Partners LLC Lawrence R. Pfeffer - Avondale Partners LLC Michael J.

Feniger - Bank of America Merrill Lynch Justin Laurence Bergner - Gabelli Asset Management Steve Barger - KeyBanc Capital Markets, Inc..

Good morning. My name is Vickie, and I will be your conference operator for 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. All lines have been placed on mute to prevent any background noise.

And after the speakers' remarks, there will be a question-and-answer session. Thank you. And at this time, I'd like to turn the conference over to Jason Hershiser. Please go ahead..

Thank you, Vickie, and welcome everyone to our fourth quarter 2016 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 have posted on the company's website presentation materials that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from Rich and Phil before we open 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 timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company. Without express written consent, we prohibit any use, recording, or transmission of any portion of the call.

With that, I would like to thank you for your interest in The Timken Company and I will now turn the call over to Rich..

Thanks, Jason. Good morning, everyone. Thanks for taking the time to join us today. I'm going to focus my remarks on the full-year 2016 as well as our outlook for 2017. I'll just make a few comments on the fourth quarter, it did come in close to how we expected from a revenue standpoint, with sales down 8%.

We do not think we had the same magnitude of year-end pull ahead as we did in 2015, which did hurt the year-on-year comp a little bit, but does put us slightly better position to start 2017.

We saw a normal seasonality with sequential strength in services and the aftermarket and weakness at OEMs and we delivered $0.47 per share in line with our guidance. Shifting to the full-year, we came into 2016 preparing for it to be a second consecutive challenging year and it's certainly prove to be.

Our business soften sequentially each quarter and we ended the year at $2.7 billion in revenue, down 7% from 2015. The decline in volume more than offset a lot of excellent work on outgrowth, cost reduction and acquisitions, as well as the benefit of share buyback. The net result was an EPS decline of 11% from 15%.

I'm pleased that while markets were slightly more challenging than we anticipated 12 months ago, we maintained the midpoint of our guidance at $1.95 per share all year, and we managed to deliver $0.02 above it. We also increased our dividend payout for the year to $1.04 and about 3.1 million shares or about 4% of the outstanding shares.

In total, we returned $183 million of capital to shareholders, while ending the year with roughly the same debt-to-cap levels as 2015. We continue to advance our strategy across all fronts.

We gained market share in wind, automotive, defense and rail, and we ended the year with a larger pipeline of new customer applications and organic growth initiatives, which will yield results in 2017 and 2018. We acquired Lovejoy couplings, as well as EDT bearings, and we successfully integrated our Belts business.

While the Belts business fell short of accretion targets due to a weak ag market, it will deliver improved performance in 2017 and has been a solid product extension. Overall, we continue to diversify our product and end market revenue to improve our growth, margins and cyclicality.

We also invested heavily in our products and manufacturing capabilities spinning over 5% of revenue on CapEx. We completed two plant closures in the year, and have two more in process for closure in 2017.

Our new plant in Romania is on track for production in mid-year and plant and capacity expansions in China and India will also be operational in 2017. We drove significant structural as well as volume related cost reductions, which help to partially offset the adverse impacts of volume and currency.

We also had an excellent year for safety, we upheld our industry leading customer service levels, and as always our customers were able to rely on the high quality levels at The Timken brand stands for.

Bottom line, we ended the year a more efficient and stronger company; and in total, given the challenging industrial markets we executed well in 2016 and positioned the company for greater levels of future performance.

Turning to 2017; in the third quarter call, we discussed that we were seeing some signs of stabilization in our markets, but not a long enough trend to call a bottom or a rebound. Since then, sentiment has improved in nearly every market in which we participate.

We still have some markets like rail, ag and heavy truck that we expect to start the year down materially from 2016, but even in these tough markets, the outlook has improved.

We've seen other markets like industrial distribution in China, shows sustained trends of improvement in orders over the last few months, and we now expect them to be growing year-on-year soon.

We are forecasting that the net impact is that we will enter 2017 off a relatively low run rate where we ended 2016 and then see improvements in markets as we move through the year. In the specific markets, we expect heavy truck, rail and ag to be down as well as some negative impact from currency.

Auto, off-highway, excluding ag, aerospace and heavy industry's expected to be neutral. And then we're planning for growth in wind, distribution, services and China. We expect to outgrow our end markets in 2017 with specific wins in wind, automotive, truck, rail and aerospace markets as well as across the general industrial distribution markets.

On the margin and earnings side, we continue to have a robust pipeline of cost reduction actions underway, including some carryover from those actions taken through the course of 2016. However, we do anticipate material cost to be higher in 2017 than 2016, and we also expect increases in compensation and healthcare.

Additionally, the volume related cost reductions are expected to moderate as we plan for sequential volume improvement. We plan for pricing to be down slightly, approximately 0.5% as we remained in a challenging pricing market through the end of 2016.

We expect all of our cost reductions to approximately offset these headwinds resulting in the relatively flat guidance. In regards to capital allocation, we planned to return to a more normal CapEx spend of around 4%, and we remain committed to our dividend payment.

Additionally, we tend to be at least as active with acquisitions in 2017 as we were last year. We have dialed back the share repurchase the last two quarters and we would expect the reduced pace to continue through at least the first quarter.

If the M&A opportunities fail to materialize through the year, we would certainly consider deploying more free cash flow to share buyback as the year progresses. Our board just approved a four-year authorization for up to 10 million shares to provide us the long-term vehicle to do so.

Prior to the incremental earnings from our accounting change, which Phil will describe momentarily, we are guiding to roughly flat revenue and earnings. Should markets continue to improve throughout the year beyond our forecast, we are in an excellent position to capitalize on it and we will be ready to do so. One final comment on the U.S.

political landscape. Many of the new administration's priorities are significant issues to Timken, and we are pleased that they are in focus. It's too early to predict the outcome and we would not expect much direct impact in 2017. But, we certainly could benefit longer-term from infrastructure spend, tax reform, and efforts to strengthen U.S.

manufacturing. Timken is the largest U.S.-based manufacturer of bearings and a strong environment for manufacturing in the United States is very good for our business. In regards to trade, this is a complex issue in our very global industry and the possible impact of trade ideas currently being floated is less clear.

We will project the impact for you when any of the ideas move from concept to reality. And with that, I will now turn it over to Phil..

Thanks, Rich, and good morning, everyone. Let's start on slide 10. In the fourth quarter, Timken posted sales of $655 million, down roughly 8% from last year. The impact of currency reduced our sales by around 1%, while the net benefit of acquisitions added sales of $12 million or around 2%. Organically, our sales were down around 9% in the quarter.

On the bottom right of this slide, you'll see our geographic performance. Sales in North America were down 8% from last year, reflecting softness across most of the end markets we serve, offset partially by the net benefit of acquisitions. Excluding currency, our sales were down 7% in both Europe and Asia, and roughly flat in Latin America.

Let me touch on each of these briefly. In Europe, aerospace, rail and automotive were lower, while we saw growth in wind energy. In Asia, China drove the decline as we had lower shipments in both wind energy and industrial distribution.

And finally, in Latin America, higher industrial distribution demand was roughly offset by continued weakness in the mobile end markets.

On slide 11, you can see that our gross profit in the fourth quarter was $164 million, or 25.1% of sales, down 160 basis points from last year, as the impact of lower volume and price mix were only partially offset by favorable material costs and the net benefit of acquisitions.

SG&A expense in the quarter was $112 million, down $7 million from last year; the decrease reflects the benefit of cost reduction initiatives and lower spending levels, offset partially by the impact of acquisitions and a slight increase to our bad debt reserves during the quarter.

SG&A was 17.1% of sales, 40 basis points higher than last year on the lower revenue. Below the SG&A line, you can see that we had $3 million of impairment and restructuring charges in the quarter related to our cost reduction initiatives.

We also had $16 million of pension settlement charges, driven by lump sum payouts, as well as $6 million in CDSOA income. Our fourth quarter EBIT was $40 million on a GAAP basis. When you back out the adjustments listed on slide 12, adjusted EBIT was $60 million or 9.2% of sales, compared to $79 million or 11.1% of sales last year.

Turning to slide 13, you can see that the decline in adjusted EBIT was driven by lower volume and price mix, offset partially by lower SG&A and material costs. On slide 14, you'll see that we posted net income of $24 million, or $0.31 per diluted share for the quarter on a GAAP basis.

On an adjusted basis, our net income was $37 million, or $0.47 per share, compared to $0.59 per share last year. Our GAAP tax rate was 24.3% in the fourth quarter, reflecting some discrete tax benefits we recorded during the period. Our adjusted tax rate was 30.5% for the quarter and for the full-year, reflecting our geographic mix of earnings.

For 2017, we expect an adjusted tax rate of between 30% and 31%. This does not reflect the benefits of any potential U.S. corporate tax reform. Now turning to slide 15. Let's take a look at our business segment results, starting with Mobile Industries. In the fourth quarter, Mobile Industries' sales were $342 million, down 10% from last year.

The impact of currency year-on-year reduced our sales by just under 1%. Organically, sales were down around 9%, driven primarily by lower shipments in the rail, automotive, and aerospace sectors, as well as lower pricing in the period. Looking a bit more closely at the markets.

Rail saw the largest declines year-on-year, driven by lower freight car build in North America and softness in both Europe and Asia. Automotive demand was down due to a tough comp last year in North America, as well as the impact of some platforms that rolled off earlier in the year.

Aerospace was negatively impacted by the timing of Rotorcraft related shipments in both periods. And, while not a big driver, off-highway was up slightly in the quarter versus last year. For the fourth quarter, Mobile Industries' EBIT was $19 million, adjusted EBIT was $26 million or 7.7% of sales, compared to $36 million or 9.5% of sales last year.

The decrease in earnings was driven by lower volume and price mix, offset partially by favorable material and manufacturing costs and lower SG&A expense. Our outlook for Mobile Industries is for 2017 sales to be down 4% to 5% in aggregate. Currency is expected to reduce revenue by roughly 1.5%.

So organically, we're planning for sales to decline around 3%, driven by market related declines in the rail sector, as well as continued softness in agriculture and heavy truck. Now let's turn to Process Industries. Slide 16 shows that Process Industries' sales for the fourth quarter were $313 million, a decrease of around 6.5% from last year.

The impact of currency year-on-year reduced sales by about 1.5%. And the benefit of acquisitions, including the recent EDT acquisition and the Lovejoy acquisition earlier this year, added sales of $12 million or about 3.5%.

So organically, sales were down around 8.5%, driven by weaker demand in the industrial aftermarket and heavy industries, as well as lower military marine revenue from POC accounting.

Looking a bit more closely at the markets, heavy industries and industrial services continue to be impacted by year-on-year declines in oil and gas and other commodity related sectors. Our performance in industrial distribution was driven by North America and China.

Note that last year was a tough comp for us in North American distribution, driven by some late December shipments. Market fundamentals and distribution did improve in the fourth quarter, as both our incoming order rates and backlog ended the year up from the prior year.

For the quarter, Process Industries' EBIT was $43 million, adjusted EBIT was $46 million or 14.6% of sales, compared to $56 million or 16.7% of sales last year. The decrease in earnings resulted from lower volume, offset partially by lower SG&A and material costs. Our outlook for Process Industries is for 2017 sales to be up 4% to 5% in aggregate.

Acquisitions should add around 2.5%, while currency is expected to reduce revenue by 1.5%. So organically, we're planning for sales to be up 3% to 4%, driven by higher demand in the industrial aftermarket, including both distribution and services as well as growth in the wind energy sector.

Turning to slide 17, you'll see that net cash from operating activities was $125 million, during the quarter. After CapEx spending of $53 million, free cash flow for the quarter was $72 million or nearly two times adjusted net income.

Our free cash flow in the period was below last year's level, mainly attributable to higher CapEx spending in the period.

From a capital allocation standpoint; during the fourth quarter, we completed the EDT acquisition and we've returned $38 million to shareholders due to repurchase of 480,000 shares and the payment of our 378th consecutive quarterly dividend. Looking across the full-year of 2016; once again, we employed a balanced approach to capital allocation.

With CapEx at 5.2% of sales to drive growth and margin expansion, $73 million spent on acquisitions and $183 million returned to shareholders through dividends and share buybacks. And we ended the year with net debt of $508 million or 28% of capital, virtually unchanged from a year ago.

Looking ahead to 2017; we expect CapEx spending at around 4% of sales. And as Rich said, we're committed to our dividend and will continue to look for attractive bolt-on acquisitions. We also have the ability to buy back shares, as earlier this week, our board approved the new 10 million share buyback authorization covering the next four years.

Turning to slide 18; you'll see that we're planning to adopt the mark-to-market method of accounting for our pension and OPEB plans during the first quarter of 2017. Under the new method, we'll recognize actuarial gains and losses in the year in which they occur, generally, the fourth quarter, rather than amortizing them over many years.

We believe this will provide greater clarity around our operating results and retirement plan performance. We estimate the adoption of mark-to-market will add around $0.15 to our 2017 adjusted earnings per share, representing the elimination of prior loss amortization. We've included this $0.15 in our 2017 outlook, which I'll cover in a moment.

Note that upon adoption, we'll retrospectively modify prior periods and we estimate the impact on 2016 adjusted EPS will be roughly the same amount around $0.15. We're currently in the process of computing the impact on all of the prior years and completing the accounting evaluation for preferability.

More information will be provided in connection with our first quarter results. I'll now review the outlook on slide 19. As Rich mentioned, while sentiment has improved across our markets, we still have markets like rail that are declining and other markets like heavy truck and agriculture that remain weak.

Accordingly, we're planning for revenue to be relatively flat in 2017 versus 2016, that's flat in total and flat organically as negative currency and the positive impact of acquisitions should roughly offset one another.

On the bottom line, we estimate that earnings per diluted share will be in a range of $1.90 per share to $2 per share on a GAAP basis. Excluding estimated restructuring charges, we expect adjusted earnings per share to be in a range of $2.05 to $2.15, which is relatively flat with 2016 at the midpoint.

Again, this includes an estimated $0.15 benefit from adopting mark-to-market in both years. Our 2017 full-year outlook implies a corporate adjusted EBIT margin of just over 10% at the midpoint. While we continue to benefit from our ongoing cost reduction initiatives, we expect offsetting headwinds in 2017 from higher inflation, price mix and currency.

Also, as Rich mentioned, we expect our performance to gradually improve as we move through the year. So, our first quarter earnings per share should be the low point for 2017. And finally, we estimate that we'll generate free cash flow of over $200 million in 2017, or more than 100% of adjusted net income.

In closing, I'd like to join Rich in thanking all of our 14,000 associates for delivering solid performance in 2016. Our team will continue to focus on outgrowing our markets, operating with excellence, and effectively deploying our capital to drive shareholder value. And, we stand ready to respond should markets recover faster than we anticipate.

Before we move to the Q&A, I wanted to let everyone know that we have planned an Investor Day in New York City on May 19. More information will be forthcoming, but please save the date. And with that, we'll conclude our formal remarks and open the line for questions.

Operator?.

Thank you. We'll take our first question today from Eli Lustgarten with Longbow Securities. Please go ahead..

Good morning, Eli..

Yeah.

Can we talk a little bit about what's going on in each of the sectors both from a topline and from a profitability for 2017? You've got a pretty good decline forecast for mobile for the year and how much of it is rail? Can you give us some idea of what's really taking it down, I guess, organic and I guess, rail, and rail should anniversary probably by mid-year, it's been going down for a while.

Does that mean that auto declines in the first half and it gets better in the second half? And from a profitability standpoint, can we talk about the 9%-plus margin? I mean, what happens to operating profitability in 2017, can it stay above 9% or are we going down for the year? And can you do the same thing for process second.

You should have a better mix of that as margins go up accordingly in that, or is it also a little over 14%, so it'll be similar margins in 2017?.

Sure. Eli, let me start with that. I'll start with mobile and rail is definitely the segment that is dragging mobile down. We're looking at say mid-teens year-on-year decline, still in that segment.

As I said earlier in my comment, I think, sentiment has improved there a little bit, but we did still see a significant double-digit year-on-year and sequential declines in the fourth quarter and still see some significant pressure there.

On the automotive side, that segment certainly starting to feel a little bit of pressure or I guess, concern would probably a more accurate word at this point, there is some concerns about inventory building up et cetera. Keep in mind, in the U.S. there we are heavy on the light truck side, and that's the side that's doing well.

But we aren't looking maybe for the year-on-year growth that we had over the last couple of years there. On the heavy truck side, we're looking for a slow start there, I would say that's an area where sentiments improved a lot over the last couple of quarters, but we're looking for that more to be kicking in, in the second half versus the first half.

And then off-highway, still an ag issue and we're definitely seeing some bottoming and some recovery in off-highway ag side, so and some of the other construction heavy equipment mining side. So, all that's netting out to the numbers that we gave you on the process side.

We're looking up a little bit in industrial distribution; and again, I'd say the sentiment there has improved considerably, I'd say, six months ago, our U.S.

distributors were talking flattish this year, now they're talking up several percent, obviously we've got our mix within that, so that's not necessarily a number that translates directly to us, but that's improved.

And we did see the sequential improvement in distribution, as I said, and that would be some normal seasonality, but it was good that we saw that and we're seeing good order trends there to start the year. So, that's encouraging.

And to your point, that has been a big part of our challenge with margins for the mix part of margins that's been a big part of our challenge for the last couple of years. Heavy industry is still pretty tough; but again, I think we're seeing the end-users of those products are certainly running harder than what they were before.

And again, the sentiments improved from steel mills to paper mills and so on and so forth. Wind, as you know, it can be a little lumpy for us, but we are with our market penetration goals expecting good penetration in wind.

Some modest growth in our services business, which is across a lot of heavy industries mostly in North America, some oil and gas in there. And I think I covered most of it. So, on the margin side, certainly not happy with the margins from last year or where we're guiding to necessarily this year.

The margin story is really – we're below our targets for both segments, still think we can get back in it – know we can get back into those ranges, but we've hit two years of currency and a lot of currency and a little bit of volume in 2015 and a lot of volume and a little bit of currency in 2016.

And then just to make one more headwind in there, a little bit of bad mix on top of it both years. So, I would say, it's a volume story for us, as we look at this year. And with volume improving through the year, we would expect to see that improve during the year. And again, we haven't changed our target margins for either of the segments.

We do believe, as I said, in my comment, we've got a little bit more inflationary pressures this year at this time than what we had last year. But the plus is, last year at this time, we really weren't seeing any of the signs of a volume turn. And this year, as I said, we're seeing a lot of clear signs that volume is stabilized and/or growing..

Can we clarify are we looking for mobile margins to go down a little bit and process margins to go up a little bit, is that a fair way of doing it? And is most of the decline in volume in mobile in the first half?.

Yeah, Eli. This is Phil. Good morning. Yeah, I think you've got it right. So, at the corporate level, we'd expect margins to be relatively flat, I mean consistent with our flat earnings guide, but we'd expect mobile margins to be down year-on-year with the volume.

And we'd expect the process margins to be up year-on-year again with the sequential improvement. We do expect to improve, as Rich said, to improve gradually as we move through the year. So, I think, I would say the organic declines in mobile would be certainly be more front-half loaded.

But, we're expecting soft rail markets as we move through the year. I mean our guide would be based on freight car builds down pretty significantly north of 30% this year from 2016. So, we'll feel that throughout the year. But, I would agree probably more front-half loaded certainly..

Great. Thank you very much..

Thanks, Eli..

We'll take the next question from David Raso with Evercore ISI. Please go ahead..

Hi. Good morning..

Hi, Dave..

I was wondering if you could help us with total company, ideally by segment, but total company where your order book is year-over-year and where the backlog is year-over-year?.

Yeah. So, if you look in our 10-K was posted, you'd see that our backlog is up. Although, I'd also say, that as we put in there in our backlog has a lot of differences in it.

And so that's one of the reasons that we don't report it, because we end up with a lot of, in the automotive industry, they don't necessarily correlate in timing or magnitude and so on so forth.

So, I'm not going to answer your question directly, David, but I would tell you, we have the signs from our last call that we see here today, have been very encouraging for sequential improvement in our order book..

Yeah. I'm just trying to equate it with your organic sales guidance. And I'm just curious if the order book is already running at the full-year guide or so. And we expect things are getting better. Why would the organic guide not even be better....

Well, we just finished....

...is there something I'm missing?.

The fourth quarter was 8% down, right? So....

Yeah..

So, we've got some work to do to get back up. And I already talked about the rail drag. And I wouldn't say, we've rebounded from the reductions that we've had in our volume over the last 24 months, but we are seeing sequential strengthening..

Okay. So, the orders are still down a bit and the improvement in those orders are why the full-year is what it is.

Is that a fair characterization?.

Well, I think, again it varies a lot by segment. So, I would say, in distribution, orders are up and they're up enough to support that we're forecasting that the business will be up for the year, that's also the shortest lead-time, generally the shortest lead-time part of our business as a lot of it is off-the-shelf.

So that can move fairly quickly, both for the good and the bad, but the trend lines are encouraging. And then on the OEM side, I think, I ran through all that already, but it's encouraging, but I think you've got to look where our starting point is as well..

No. I appreciate that. And a quick question on the pension accounting change.

Where is that going to show up? Is that a help to the business segments or the corporate expense, just so I'm clear on when we take your margin comments by segment, should we be incorporating the pension accounting in that or no, it's corporate?.

Yeah. No. Great question, David. This is Phil. Good morning. It would affect the segments in corporate as well. So, if you want to think about it, the $0.15 would, call it, roughly translate to $15 million to $20 million of EBIT, if you want to think about it that way.

And I think if you win a-third, a-third, a-third across mobile, process and corporate, you'd be pretty close.

We're still finalizing the numbers obviously, but I think that would certainly get you pretty close, so it would improve margins at the corporate level, also improve margins at the segment level, but not to the same degree, because of that corporate piece..

And I just remember or maybe I missed it, clarification.

Price cost, you mentioned some of the pricing pressure, just if you maybe can articulate where you're seeing it more than others be it geographic, be it business segment, and then how do I think about price cost for the full-year?.

The first part of the question David was about where we're seeing price pressure?.

Correct.

Be it product segment, be it geography, and just how you're thinking about the pricing pressure?.

Yeah. So, I think the most of our OEM business would be locked in for the year or we'd be forecasting where we're picking up new business or losing it through the course of the year. So, that's roughly half of the business where pricing – we should have a pretty good feel for where pricing is going to be, excluding material surcharge.

So, if material surcharges moves up through the year, we would pass that on that would come through as favorable pricing, if that were to happen. With a little bit of lag last year that was a drag for us on pricing. So, that would be where the erosion is.

As you look at the aftermarket, we did do some pricing last year to where we could to recover both – mostly currency, I would say. But, we're fairly selective in what we did there, we are looking to do some more this year. And, certainly there, we have the ability through the year to move pricing more readily than on the OEM side.

And don't have anything to say about that just yet, except to say, that it's factored into our 0.5%-ish..

So, that was a 0.5% for the full-year? Correct? That you said, right, pricing down....

Correct..

...50 bps for the year? Okay..

Correct..

I appreciate it. Thank you very much..

Thank you, David..

Next is Stanley Elliott with Stifel. Please go ahead..

Hey, guys. Good morning. Thanks for taking my call. Quick question on the balance sheet. So, when you look at the free cash flow numbers you're looking at plus kind of continue to accelerate the dividend, shouldn't you be way below kind of the longer-term range that you all have spoken about.

You've talked about maybe some pickup at some of the bolt-on in the M&A, but really you guys would have the capacity it would seem like to do some larger deals.

Can you talk maybe about the M&A landscape? What are you seeing out there? What are your thoughts? And then potentially moving in businesses beyond some of the heavy industries like the food and beverages that you guys just did here recently?.

Sure, Stanley. Morning. This is – so, let me hit that in a few different places. As I talked about, we are down back to share buyback a little bit under the anticipation that we would be at least as acquisitive.

But to your point, we're only as acquisitive as we were last year, we'd still have significant cash flow beyond that, and that was the point I was making. We would not envision having any platform to pay down debt, this year, if anything, we're a little below that.

I wouldn't see – our targets, I wouldn't see going above the targets materially for share buyback at this time, but certainly, we would like to for the right M&A transactions.

I believe we've been working the pipeline now harder sequentially for a couple of years, and building confidence that we will see at least the level of activity we've seen in the last couple of years or slightly better. I would say the vast majority of what we are working on is in the same size range that you've seen.

So, in the $10 million in revenue to $150 million in revenue and not a lot in our space that we're working on that is larger than that. Every once in a while those do happen, certainly we'd be interested in taking a look at them, but wouldn't really have anything to comment on that.

So, obviously, we don't have anything to report on today, but we do believe we've got enough in our pipeline that we'd be very disappointed if we weren't successful with at least a few bolt-ons through the course of the year..

Perfect. And then on the cost side, you guys have obviously done a fantastic job taking out cost.

How do we think about additional cost-out opportunities going forward? With the new plant coming along versus – well, versus the recovery in some of the markets you're talking about? And then maybe just refresh us how much carryover on the cost savings you'd have in 2017 versus some of the actions you've done in 2016? Thanks.

I'll just start it out on a general and I'll let Phil comment and come in if he wants to say a little bit more. We've still got a lot of really strong activities on the cost side. And as you said, we also have some carryover.

As we look at our cost reduction over the last two years, and there is some overlap of this, but there is parts of it that have been more volume related. You're making 100 bearings last year, you're making 90 this year, get the variable costs associated with the 10 out, and that's the part that I think will moderate.

But obviously, if any of those costs come back in they'll be with the volume. And then, we've had a lot of work on structural cost. We've done a lot of work with our footprint.

We've done a lot of work with our product design, we've done a lot of work of our management efficiency, information technology and so on and we expect to get a lot of leverage off of that.

So probably came in, as we're sitting here today, a little less bullish on the price, the price cost factor maybe from where we would have been a little bit maybe six months ago, because we've seen a little more pressure on the material side.

But I would also say, while we work very hard to work our steel input costs and keep them low, the reality is strong steel pricing generally correlates really well to strong bearing markets, and we have never had problems recapturing those steel prices.

So while it creates a little bit of short-term, I would look at a strong steel market or an improving steel market as a very bullish sign for our industry globally. And one that we would expect to capitalize on, but as we look today with what's happening with some of the prices, in a quarter or two, it probably creates a little bit of a squeeze.

Anything you'd want to add to specifics on that, Phil?.

Yeah, sure. Hey, Stanley. This is Phil. So, I think Rich summed it up well, I think the only thing I would add is, we do – based on the year end run rates, would expect some carryover from what we did this year. And as you know, we took quite a bit of cost out in 2016.

So, I think, ballpark-ish, we'd expect roughly, full-year impact, $20 million carryover from 2016, probably at least an equal amount of new initiatives we're working on for 2017 which again will come in throughout the year.

But, I think to keep in mind, as Rich said, with the inflation, that's input costs, material as well as compensation (40:55) and benefits. And on the material, keep in mind there is a lag there.

So, while we do have the ability to price in the aftermarket to recover the OE contracts, there can typically be a lag where it can be a bit of a headwind for a while until it catches up.

So, when we factor that in then the other elements of inflation, couple that with the price mix, which we would expect price mix net in 2017 to be unfavorable for the year. It's largely offsetting the benefits of those cost reduction initiatives and really getting us back to that flat earnings guidance..

I think, you also asked Stanley, about Romania. And I'd say, the plant is on track, we've got some new business coming on as a result of it in some new product categories.

But it's not a big swing factor for us in 2017, it's really going to be – obviously, we've also got a lot of empty part of the plant, so it's going to take us a little while to ramp it up. But it's a bigger swing factor for us in 2018..

Great, guys. I appreciate it. And best of luck..

Thank you, Stanley..

Thanks, Stanley..

And Sam Eisner with Goldman Sachs is next..

Yeah. Good morning, everyone..

Good morning, Sam..

Hey, Sam..

Just going back to the process guidance here. You're exiting the year with a 9% or nearly 9% organic decline. You guys are guiding to roughly 3% to 4% growth. Can you maybe talk about monthly trends that you're seeing there.

And if you can give some commentary about what you're seeing in January, that would be helpful to kind of qualify what – in order to get to that 3% to 4% growth..

Yeah. So, let me make two comments. One, the seasonality of our services business and that is a significant move from the fourth quarter, which is the best quarter of the year for the services side, and a significant fall-off to the first quarter and that's MRO spend and holiday shutdowns and year-end, et cetera. So, we have that dynamic.

Now that part of the business did improve for us sequentially from the third quarter to the fourth quarter, but it was down materially from prior year, a lot of that in the oil and gas space et cetera. So, I do expect that to improve, and we'd expect again by the end of the year for that to be up year-on-year.

And then I think you said earlier on the heavy industry side, still depressed, but flattening. And then on the industrial distribution side, I would say, the trends are very encouraging. And the only caution I'd put on that is, we're five weeks into the year, but the first five weeks are starting off very encouraging..

Got it. That's helpful there.

And then maybe Phil, you talked about some of the inflation, obviously the materials and healthcare, compensation, can you put any numbers around that similar to what you just did with regarding the cost take out? I think you said that was around $20 million carryover, but if you can help us on the EBIT walk there, that would be helpful..

Yeah. That's quite tough for us to do, we typically wouldn't go into that much detail on those individual cost increases. But clearly, we would expect some inflation on material. We have secured some nice, call it, base price reduction that will mitigate that a bit, but do expect that inflation to hit.

And then on the competition and benefit, it's across healthcare, it's certain parts of the world where their wages are going up and we've got to meet the market. And obviously, incentive compensation plays into it as well. So they're all in there and that's probably as much details we'd be wanting to give on at this point..

Maybe ask a different way. Your SG&A as a percentage of revenue has fallen from 17.5% now down slightly under 17% in 2016. In a growing end market, let's say, that process continues to grow and let's say you may be a little bit positive for the year, do you think that you can hold SG&A flat as a percentage of revenue.

Do you think that will be up, do you think it would be down? Can you just walk through the moving pieces there?.

We're guiding the flattish for 2017. But certainly with volume, we would expect to drive that down.

And we've got a lot of structural cost reductions there, they've largely as a percentage, largely been offset by the volume declines, but we would certainly expect leverage on that, and would expect to be able to drive that number below 16% as a corporation..

And then just a quick clarification, did you say that pricing embedded in your guidance is a 50 bps headwind? I think you had originally guided to about 100 bps headwind, guided two quarters or three quarters ago, so I just wanted to double check on that?.

Yes, 50 bps. Got it..

Thanks..

Thanks, Sam..

And we'll go to Joe O'Dea with Vertical Research Partners..

Hi, good morning..

Hey, Joe..

Hi. I think, first on Romania, just, do you think about that as a net plus minus or neutral for the year when some revenue contribution, but also you touched upon in other part of that facility that just won't be operating some of the costs associated with getting things going there.

So, just whether we should think about that as a net positive or minus or not really a big needle mover?.

I would say in 2017 not a big needle mover. And we're looking to move the needle on it in 2018..

Okay. And then on the process aftermarket side of things. I don't know your willingness to talk about what kind of a growth rate to anticipate in the first quarter and then what that means for growth in the latter part of the year.

But just when you talk about it as shorter lead time type of business, sentiment clearly improving, but it sounds like the growth rate in the first quarter won't be at the full-year target and just given the shorter lead time nature of the business, the comfort level with an acceleration over the course of the year some of the things you're seeing to help drive that comfort level?.

Yeah, I would say, the order trends what I said are very encouraging. There is some typical seasonality there.

So again with the MRO nature of a significant part of that business, the fourth quarter and the second quarter tend to be the strongest two quarters of the year, there's usually a little bit of drop-off from the fourth quarter to the first quarter with normal seasonality.

But again, I think, as you compare the order trends we're seeing over the last three months as compared to what we would have been seeing over those same three months, 12 months ago, very encouraging that we will see better comps through the year.

But I think to your point that it – the first quarter would likely be the low point of the year for that part of the business..

Okay. And then just one more on M&A. And it sounds like encouraged by some of the activity in the pipeline there.

From a valuation perspective and just as the general tone across industrial improves, is that also translating in having to pay up a little bit for these deals in order to move things forward?.

Certainly, all of the big deals that get headlines in the industrial space have been at double-digit type multiples.

We have generally been in the smaller private transactions, but I think it's fair to say that the prices that we have paid for the last three transactions we've done would also be at a turn or two higher than what the historical average would be.

I think part of that is a reflection of where multiples are today, I think also part of it is that earnings are well-off peak earnings. I don't think anything has changed in that, so I wouldn't imply that we think we're going to be buying businesses at a couple turns under what the market has been at.

I think it's more a confidence that we have been working the pipeline and the activities that we have been doing will give us several looks this year at that. And then, I think we're in an excellent position to bring those in, integrate them and both help them grow as well as improve the cost structure.

So, I think, it's more self-help on our part than it is any real change in the M&A landscape in the last year or so..

Very good. Thanks very much..

Thanks, Joe..

And we'll now go to Larry Pfeffer with Avondale Partners..

Good morning, guys..

Good morning, Larry..

Good morning..

So, lot has obviously changed in the last couple of months. And I know last quarter, you talked about not necessarily expecting to see earnings growth until the second half of 2017. Not necessarily expecting you to give quarterly EPS guidance, but just kind of the normal sequential walk between Q2 and Q4, those would normally be relatively similar.

Should we model kind of on that kind of a cadence or do you think there is a bigger jump between Q2 and the second half of the year than maybe we've seen in the past?.

The first quarter we would expect to be the low point. We'd expect some normal compression of the fourth quarter from mobile. And then with improving markets through the year, second quarter may still be at the high point, because sometimes it is, but it could depends on how robust the markets are going from there.

I think that's probably as explicit as would want to be..

Okay. Fair enough.

Looking from a different perspective, where do you – in customer conversations you're having right now, are people – are you getting to the point where guys are talking about volume levels coming back very quickly? Or is it just still early in the broader improvement and sentiment?.

I would say folks are talking about volume levels coming back in bigger numbers than again what they were just three months ago and they're backing some of that up with orders, which they weren't doing three months ago even when they were talking about it. And I would make one more comment.

Our markets historically don't typically move gradually, right? They are momentum markets and they're almost always moving. Very rare that you'd see a couple years of plus or minus 1% or 2%. So, I'd just say all the signs, Larry, are encouraging that we could be in for some movement here.

We've had a couple of fake moves on that in the past, but we've been hesitant to jump out too far in front of that, but the signs are good..

Got you.

And is there anywhere you think you'd feel capacity constrained? Is there any market or geography where if things did come back after all the structural cost take-out you've had that you feel like you have to bring some back?.

No. And we've talked about this, one place where we have a lot of dedicated unique capabilities is wind, and that really isn't necessarily tied to the industrial cycle anyway and we look to make investments there as we're doing some commercial.

So, there are some shared assets within that, and that market has grown a lot, while some of these other markets have compressed. We'll run a fairly high utilization level there by design, and that's happening, but we also have some capacity coming on this year that we expect to be a part of our growth.

So, we could handle a pretty good short-term step up, and that's it, we could handle some pretty good growth..

Got you. Thanks for the questions, guys. Best of luck in the quarter..

Thanks, Larry..

Thanks, Larry..

Next is Michael Feniger with Bank of America..

Hey, guys. Yeah. Just filling in for Ross..

Good morning..

Good morning, Mike..

Good morning, guys. I'm filling in for Ross. I know you guys expect pricing down 50 basis points. It seems that's more in the OE channel.

Are you seeing any specific pressure coming from maybe European peers, or emerging market peers and emerging market players? I'm just curious if you give us more broader description of what's actually going on in the pricing backdrop?.

I would say, we generally don't compete against emerging market peers. So my answer to that on a broad basis would be no, and there is, in India, and some places locally there's some exceptions to that. But generally, we are competing against the big global bearing companies, and then typically some strong regional niche players.

And obviously, over the last couple of years, we've had a lot of movements with currency, and there's been a lot of these, if anything, I would say, the Japanese currency has moved a little bit more back in our favor over the last 12 months or so, and that's been a positive to euro as stabilized.

And I would say, we're seeing a normal market, where OEMs after a couple years of their own focus on cost versus growth, it's a tough market out there to be winning new business and new applications where you got to give some things and you get some things, and I think we're managing that well and netting it out relatively flat the last couple of years..

Great. That makes sense. And just last question, you guys clearly have communicated you're seeing this pick up in orders in the industrial distribution business and on the aftermarket. But a lot of the other end markets you guys are guiding to are flattish.

So, I'm just curious, how much do you feel like this pick up in industrial distribution and aftermarket, how much of this could be a rebasing of inventories from your channel check? I mean was inventory maybe just too low and there is this catch-up going on? Or are you hearing that distributors really want to build inventories in anticipation of a better growth environment?.

Well, it's not the latter. I don't think they're actively looking to get out of here and build inventory. And with where we are as a part supplier with a mix, with aftermarket and OEM, when the OEMs in the heavy equipment space go to flat, when they move from couple years of declining to flat, that would typically mean we would be up.

So, we would see that a little bit earlier and a little more pronounced, because of that inventory correction that you talked about, but I think it's a – the normal flow of inventory versus the manipulation of inventory or anybody trying to get too far out and front of things would be our interpretation of it at this point.

So, I think the other part of that though that's positive and we're seeing it in the industrial distribution channel, I mean, you should see it as well in the OEM service channel, that we also provide to you around the world, and I would say, it's a normal inventory correction..

Perfect. Thanks, guys..

Thanks, Mike..

And we'll go to Justin Bergner with Gabelli & Company..

Good morning..

Hey, Justin..

Good morning..

Thanks for fitting me in. First question just relates to price cost. You mentioned the 50 basis point headwind from price.

Should I assume that the price cost headwind then would be slightly greater than 50 basis points?.

No, I think we're sort of thinking, when you think of price cost, we are going to have some inflation pressures there as we talked about. So, price cost pre-inflation will be favorable; but post-inflation, neutral; and then obviously, flattish at the total earnings line..

Yeah. Keep in mind too we've got, in addition to the price, we've also got a little bit of currency headwind into that as well. So, in the flat guidance, we've got to offset all those, which is essentially what we're committing to on virtually no volume in the guidance..

Okay.

So the negative 50 basis points is more of a price cost than a pure price?.

No, that's the pure price part. And then, we're offsetting that with cost..

Right..

Okay. Thank you.

Is mix supposed to be a positive or a neutral or negative as you look into 2017 versus 2016?.

Well, there's some pluses and minuses. Rail is definitely a negative for us with that being down. Distribution coming back is very favorable, not looking for it to be, as we add up all the miscellaneous pieces, a big needle mover.

And the upside of that certainly is if industrial distribution continues to improve through the year, there would certainly be upside to the mix equation there..

Okay. Great.

And then just lastly, could you comment a bit about what you're seeing in China and particularly the wind industry in China? I know you had an optimistic component in your outlook for 2017 on China and it just hasn't been discussed, so I'd be curious to hear your thoughts?.

So, yeah, we didn't have a real strong finish in the fourth quarter with China or Asia. Asia numbers were down, but some of that was lumpiness and timing and in particular when you get into the wind business, quarter-to-quarter, can't read too much into the sequentials and you really need to look more – we focus more on year-to-year within that.

So definitely see China growing this year, wind being an element of that, also see some same trends that I was talking about with North American distribution inventory stabilizing and that resulting in growth for us. So feel good about China, as we head into 2017 both from a wind perspective and from a broader general industrial market perspective..

Right. Thank you so much..

And we'll go to Steve Barger with KeyBanc Capital Markets..

Hi, thanks for getting me in..

Hey, Steve..

I want to go back to the – hey, good morning. I want to go back to the capacity question just from a different angle. There obviously has been a lot of restructuring over the past few years.

What's your thought on how much revenue the footprint can support without needing to add manufacturing labor back into the equation? I know mix matters, but if revenue were up 10% over the next year-and-a-half could you support that without a lot of cost addition?.

Well, we have the capacity for it. But no, I would say from a variable labor cost we've been chasing that down. And so, we don't – we do it through hours, work weeks, and in some cases try to do it with contingent labor and flexible labor.

But, obviously, we've gotten into our workforce a little bit with what we've been through the last couple of years. So, we would definitely be looking to add some labor to make that happen. But that's a positive for us.

And certainly, we think we are catching the – where we've been chasing the variable side of cost down for the last couple of years, we feel we are catching that really in the first part of this year. And that will be a good thing for us..

So presumably, if you had a fairly stable revenue ramp into the back half and the first part of 2018, you could support that without a lot of labor addition, but a more rapid increase you'd have to add people?.

Well, we would look to – if we're seeing the signs of it by the middle of the year and continuing, we would be adding people throughout. But the first switch you flip is overtime and filling some things in. So, that would be the variable side of our manufacturing cost.

Again, we would get really good leverage on that, and that would be a significant positive for us. So, obviously the downside of that is, at some point, you'd have to adjust back if things neutralize. And we have built a lot of cost flexibility into our operating structure over the last decade.

So, we've seen that on the way down, and I think we will see the opposite effect of that, which would be a positive on the way up..

Yeah. The only thing I'd add, Steve. This is Phil. As you know, we've invested through the cycle, so we've invested a lot over the last 10 years in brick-and-mortar, and as Rich said, we have the ability to leverage that.

So, while we'll have to put variable labor in, leverage the fixed costs, and we believe generate strong incrementals with the volume..

Understood. Thank you. Inventory in 4Q, basically flat year-over-year despite the decline in sales.

Are you especially heavy or light anywhere relative to your end market view? And do you need to build inventory now for the distribution channel?.

Yeah. I think in the fourth quarter, I thought we took a little bit of inventory out, but we'll have to double check the number, but feel pretty good about where we are at from an inventory perspective.

And our inventory plan for the year from a build standpoint is kind of lined-up with our outlook, and as things improve, we monitor it daily, and obviously, have the ability to respond relatively quickly if we see things pick up..

When you look at past cycles or as you think about what you're seeing right now, do you have a view on how long an OEM inflection takes relative to a pickup in distribution volume, or your service demand?.

Yeah. I would say it's at least typically a couple quarters, right, where the inventory normalizes, the aftermarket consumption hours on our product, et cetera, normalizes with our sales and we certainly believe we've been producing and selling less of our product than what it is being used in around the world, and that catches first.

And obviously a lot of these capital, the capital – good side of it is still significantly depressed, and I think as you look across some of the big names out there, they are still being pretty cautious on the new equipment build side, at least through the first half of this year, so would be more on the aftermarket and OEM services side where we would see the improvement..

All right. Got it. Thank you..

Thanks, Steve..

And I'd now like to turn it back to Jason Hershiser for any additional or closing remarks..

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

Thank you very much. I'd like to thank everyone for your participation today and you may now disconnect..