american gear manufacturers association steel consumption update cengiz kurkcu president -...

American Gear Manufacturers AssociationSteel Consumption Update

Cengiz Kurkcu

President - Industrial Engineered Steel Solutions

The Timken Company

March 9, 2011

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

2

The Timken Company

Founded in St. Louis in 1899 by Henry Timken after receiving patents for a tapered roller bearing

Relocated to Canton, Ohio, in 1901

Began steel production in 1917 $1 billion in revenue – 1978 $2.2 billion in revenue – 1995

3

Our History

Excludes intersegment sales

2010 Total Sales: $4.1 Billion

Steel$1.3 Billion

Bearings& Power

Transmission$2.8 Billion

The Timken Company

4

Alloy Steel & Value-added

Solutions

Oil & GasMobile On-Highway

Industrial

SteelGroup

Bearings andPower Transmission Group

Mobile Industries

Light VehicleOff Highway

RailAuto Aftermarket

Heavy Truck

Aerospace & Defense

DefenseCommercial

General AviationPositioning Control

Health

ProcessIndustries

Heavy IndustriesIndustrial Processes

Gear DrivesEnergy

Industrial Distribution

Our Business Structure

Steel Group

5

Oil & GasHeavyweight Drill PipeDrill BitsDrill CollarsMud MotorsTool JointsSupply Chain ManagementValue-Added Machining

Mobile On-HighwayPassenger CarLight TruckMedium/Heavy Truck

IndustrialAgriculture, BearingConstruction EquipmentDistributionIndustrial MachineryMining, RailPower TransmissionWind Energy

Steel Group 2010 Net Sales

6

Market SelectionRail

IndustrialMachinery

PassengerCar

Light Truck

Heavy Truck

Vehicle BearingSteels

DrillingEquipment

ProductionEquipment

Industrial BearingSteels

Wind & PowerGeneration

Off-Highway & Transportation

Aerospace & Defense

Farm & Mining Equipment

Mobile On-Highway35%

Oil & Gas17%

Industrial48%

Steel Group

450 grades of carbon and alloy steels Special bar quality steel Seamless mechanical steel tubing Well-boring and finishing products Precision steel components

7

Our Products

Steel Group

Applications

BearingsBearing RacesFuel InjectorsGun BarrelsCrankshaftsOil Field ToolingCV JointsTransmission Gears

FastenersHand ToolsLeaf SpringsShopping CartsTable LegsReinforcing Bar C

om

mo

dit

ies

High

Per

form

ance

Low

Applications

BearingsBearing RacesFuel InjectorsGun BarrelsCrankshaftsOil Field ToolingCV JointsTransmission Gears

FastenersHand ToolsLeaf SpringsShopping CartsTable LegsReinforcing Bar C

om

mo

dit

ies

High

Per

form

ance

Low

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

8

80

90

100

110

120

130

140

150

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

60

70

80

90

100

110

2006-0

1

2006-0

4

2006-0

7

2006-1

0

2007-0

1

2007-0

4

2007-0

7

2007-1

0

2008-0

1

2008-0

4

2008-0

7

2008-1

0

2009-0

1

2009-0

4

2009-0

7

2009-1

0

2010-0

1

2010-0

4

2010-0

7

2010-1

0

20

30

40

50

60

70

2006-01

2006-04

2006-07

2006-10

2007-01

2007-04

2007-07

2007-10

2008-01

2008-04

2008-07

2008-10

2009-01

2009-04

2009-07

2009-10

2010-01

2010-04

2010-07

2010-10

2011-01

Key Economic Indicators

9

Industrial Production Index (IPI)• PMI up 0.6 points from February and the highest since May 2004

• WLI up from January

• Industrial production highest since August 2008

Purchasing Manager’s Index (PMI) Weekly Leading Index (WLI)

U.S. Vehicle Sales Rates - SAAR

1010101010101010101010101010

13.2

10.4

11.512.2 12.2 12.5 12.5 12.6 13.0

14.9

16.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

(Mill

ion

s)

2008 2009 2010 OCT 10 NOV 10 DEC 10 JAN 11 2011 2012 2013

Source: Ward’s Automotive Weekly & IHS (forecast)

Sustained recovery with slow growth into 2011

Mid

-Mo

nth

Fo

rec

as

t

N.A. Medium & Heavy Truck Production

11

Estimate over 500,000 tons of future SBQ demand

334364 363

492

593

642

421

353

217255

350

433

526561

526496

521

576610 610

0

75

150

225

300

375

450

525

600

675

750

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Th

ou

san

ds

Of

Tru

cks

37%

24%

21%

7%

Key Industrial Indicators

Industrial Machinery Durable Goods Railroad Equipment Mining (excluding Oil & Gas) Construction Machinery Agricultural Machinery Utilities

12

2011 vs. 2010

18%

9%

-4%

3%

4%

4%

1%

Global Drilling vs. Timken Steel Supply

13

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1/4

/2008

3/4

/2008

5/4

/2008

7/4

/2008

9/4

/2008

11/4

/2008

1/4

/2009

3/4

/2009

5/4

/2009

7/4

/2009

9/4

/2009

11/4

/2009

1/4

/2010

3/4

/2010

5/4

/2010

7/4

/2010

9/4

/2010

11/4

/2010

1/4

/2011

3/4

/2011

Key Oil & Gas Indicators

14

US Rigs Drilling for Oil Approaching

50%

Natural Gas Storage Level

Natural Gas: Henry Hub Crude Oil: WTI Cushing

Market Segment Outlook - 2011

15

Oil & GasOil & Gas IndustrialIndustrialMobile On- Mobile On-

HighwayHighway

• Sustained market recovery for light vehicle market

• 2011 production forecast at 12.9 million vehicles, 9% above 2010

• Initial stage recovery for medium and heavy truck market

• Strong demand expected through 2011

• Customer inventory replenishment continues

• Healthy orders in most end-markets & products

• Higher oil prices drive 11% world rig count growth

• Exploration & Production budgets increase 11% in 2011

• Horizontal Drilling continues to grow

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

16

World Apparent Steel Use

17

New record(2010)

GrowthslowingP

erce

nt

Cha

nge

NAFTA Apparent Steel Use

18

2011

U.S. SBQ Apparent Consumption

19

Source: AISI & Timken Data

Bar & Tube Lead-times

Hot Roll Bar Hot Roll Tube

Month Timken Domestic Timken Domestic

Jan-10 8 8 9 7

Mar-10 14 12 14 7

Apr-10 19 15 15 7

Jul-10 30 26 22 7

Mar-11 Allocation(1) 40 29 7(2)

20

Weeks

(1) July 2011(2) If billets available

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

21

Steel Group

22

Strategic Focus

• Small bar mill

• Custom heat treat

• Large bar UT inspection

• New high carbonfurnace

• Forge press

• New products / customers

• Value selling

• Market plan / market selection

• Global oil & gas supply chain

• International warehouses / supply chain

• Tube finishing line

• Lean6Sigma / continuous improvement

• Operational improvements

• Lay down yard

• Timken Boring Specialties

• Daido Steel Collaboration

• City Scrap & Salvage

Strategic Plan

Global diversity & leadership Differentiated solutions Attractive, long-term risk-adjusted

returns Effective business cycle management

23

In-line Forge PressTube Finishing Line

Small Bar Mill

Large Bar UT

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

24

Inquiry Turnaround

25

74%

41%

72% 70%

17%

12%

18%16%

7%

38%

5%

10%

2%

9%

5%4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Industrial Mobile On-Highway Oil & Gas Total

0-2 Days % 2-10 Days % 10-20 Days % Over 20 Days %

January 2011

New Business Sales Ratio

26

0%

5%

10%

15%

20%

25%

30%

35%2

01

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oc

t-1

1

No

v-1

1

De

c-1

1

20

11

Fc

st

YT

D

Actual Plan

Advanced Program Management

27

Stage-Gate Process

Strategic Alignment

Strategic Evaluation

Feasibility Analysis

Business Case

Commercial Development

Implement Strategy

Product Life Cycle

IdeaStage 1

Discovery

Stage 2

Evaluation

Stage 3

Concept

Stage 5

Validation

Stage 6

LaunchG1 G2 G3 G4 G5Stage 7

ControlG6

Stage 4

Development

Define Implement RealizeIdentify

Decision Agenda Execution Agenda

PRODUCT DEVELOPMENT COMMERCIAL DEVELOPMENT

New Equipment Capability– Radial Flow Forming

Grade Development– Iron Aluminum Platform

– API-6A Specification

Processing– Non-Ferrous Piercing

– Raise Bore Drill Rods

New Equipment Capability– In-Line Forge Press (<16”)– Internal Green Machining

Grade Development– FSP Premium High Carbon– Gear Steels

Processing– Large Sound Center

Bar (<16”)

Gear Steels

Clean steel– Longer bearing and gear life

– Power density

Timken offers over 400 different grades– Common gear grades 43xx (18CrNiMo7-6) and 41xx

(42CrMo4)

Demanding gear applications– Rail (locomotive), mining, wind, off-highway vehicles

28

Developing Local Presence

29

Value Add SupplierFacilities

Plants

Sales Office

Warehouse

Role of agents and forwarders Local sales and service teams Local operating partners

– Ventures and agreements

New Asia collaboration model – high performance regional supply chain

Sales Agents

Need for operating presence

– Commitment of customers and suppliers

– Investment in plant and warehouse

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

30

World Crude Steel Production

31

Source: worldsteel

1,413.6 Million Metric Tons (2010)

Europe22%

North America8%

South America 3%Africa 1%

Middle East 2%Australia / New Zealand 1%

Other Asia19%

China44%

Supply Tensions Will Remain

32

China’s Iron Ore Purchases

Source: JB Were, First River

1997-2010 (July) Annual / Monthly ($/ton)

33

China Iron Ore Drives US Scrap Price

Monthly

Source: Vale, AMM, First River analysis

Key Approaches– Regional scrap management

– Industrial accounts

– Scrap consulting & brokerage

– Supply agreements

Timken Metal Recycling Strategy

34

Auto Wreckers Ind. Accts. Other Scrap Yards

Raw Material Feedstock

Shredder

ObjectivesReliable supply of iron units at a competitive cost

Capture the return flow of scrap from the customers / suppliers

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

35

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Alloy Steel - USKWH per Shipped Ton

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Alloy Steel - USMCF per Shipped Ton

36

Continuous Improvement

Natural Gas ConsumptionMCF per Ship Ton

Electricity ConsumptionKWH per Ship Ton

Green Trends & Steelmaking

Green Trends & Steelmaking

Regenerative burner technology

Waste heat recapture systems

Automated scrap cutting

37

Agenda

The Timken Company Market Outlook Current Business Cycle Business Strategy New Business Development Raw Material Trends Green Trends & Steelmaking U.S. Manufacturing

38

U.S. Manufacturing

American manufacturers start with a non-production cost disadvantage of 18% versus our major trading partners

– U.S. steel producers spend 18% more on taxes, energy, benefits, torts, and regulatory compliance than our foreign competitors

39

U.S. Manufacturing

Tax Structure– Second highest among all OECD countries

– Double-taxing global revenues

– R&D tax credits

Regulatory Discipline– EPA regulations

– OSHA policies

– NLRB directives

Energy Policy– Investment in energy infrastructures

– Energy efficiency and conservation

– Diverse portfolio of fuel sources

40

Restoring Balance

Collaboration – Vital to Future Success

41