Park Ohio Holdings Corp (PKOH) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Park-Ohio third quarter 2003 financial results conference call. All participants will be able to listen only until the question-and-answer session of the conference. This conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce the host for today's conference, Mr. Robert Dolsek, Secretary and General Counsel of Park-Ohio Holdings. Sir, you may begin.

Thank you. Good afternoon, ladies and gentlemen. Before we begin the conference call, I want to remind you that we will be discussing some issues that are historical, and some issues that are forward-looking. When we talk about future results or events, there are a variety of factors that can materially change our actual results from those projected. You can find a list of our relevant factors in our earnings press release, as well as in our 2002 10-K.

During the conference call, we may discuss the company's EBITDA. EBITDA is not a measure of performance under Generally Accepted Accounting Principles and considered non-GAAP financial measure as defined by the SEC. We present EBITDA because management believes that EBITDA could be useful to investors as an indication of the company's ability to incur and service debt and because EBITDA is a measure used under our revolving credit facility to determine whether we may incur additional debt under such facility.

For a reconciliation from income before income taxes to EBITDA, please refer to our current report on Form 8-K, furnished to the SEC. Thank you. At this time, I'll turn over the conference call to our Chief Financial Officer, Richard Elliott.

Good morning. As usual, I will provide an overview of the financial results. First, performance for quarter three 2003, compared to the same quarter in 2002. Net sales for the three months ended September 30, 2003, for the ILS segment were $89,436,000, as compared to the same three months the prior year, $104,769,000 for a reduction of $15,333,000 or 14.6%. Aluminum products, the most recent quarter net sales, $20,045,000 compared to the same quarter the prior year $24,729,000 for a reduction of $4,684,000, or 18.9%. Manufactured products current quarter, $37,349,000, compared to $28,334,000, an increase of $9,015,000 or 31.8%.

Consolidated across the company then, total net sales for the most recent three months were $146,830,000, compared to $157,832,000 last year, a reduction of $11,002,000 or 7%. Consolidated gross profit in the most recent three quarters was $21,752,000 compared to $23,193,000 last year, a reduction of $1,441,000 or 6.2% Gross margin, the most recent quarter then, was 14.8%, up .1% from the 14.7% of the same quarter a year ago.

Operating income for ILS this quarter was $5,847,000, compared to $7,676,000 same quarter last year, a reduction of $1,829,000, or 23.8%. Aluminum products, operating income $1,901,000, compared to $1,367,000 last year, an increase of $534,000, or 39.1%. Manufactured products recorded an operating income of $563,000 compared to a loss of $115,000 to operating income last year, for an increase of $678,000 or an infinite increase. Consolidated operating income then was $6,744,000 compared to last year's $7,691,000, a reduction of $947,000, or 12.3%.

Looking at operating income percentages, ILS recorded 6.5% this year, compared to 7.3% last year. The aluminum products segment recorded 9.5% this year compared to 5.5% last year. And manufactured products recorded 1.5% this year, compared to a .4% loss last year. On a consolidated basis, operating income percentage was 4.6%, compared to 4.9% last year. Now, performance for the first nine months of 2003 compared to the same period in 2002.

Net sales, ILS, $278,312,000, compared to $304,511,000, a reduction of $26,199,000 or 8.6%. The aluminum products, $68,018,000 compared to $81,232,000, a reduction of $13,214,000 or 16.3%. Manufactured products, net sales of $115,266,000, compared to $92,557,000, an increase of $22,709,000 or 24.5%. Total net sales then were $461,596,000, compared to $478,300,000, a decrease of $16,704,000 or 3.5%. Consolidated gross profit was for the first nine months -- was $72,008,000 compared to last year's $69,271,000, an increase of $2,737,000 or 4%, yielding a gross margin percentage of 15.6%, compared to last year's 14.5%.

Operating income for the first nine months, the ILS segment recorded $17,932,000, compared to last year's $18,042,000, a reduction of $110,000, or .6%. The aluminum products segment recorded operating income of $8,701,000, compared to last year's $5,118,000, an increase of $3,583,000, or 70%. The manufactured products segment recorded operating income of $4,309,000, compared to last year's $1,053,000, an increase of $3,256,000, or 309.2%.

On a consolidated basis, operating income was $26,301,000, compared to last year's $20,559,000, an increase of $5,742,000, or 27.9%. Operating income percentages for this year for the ILS segment, 6.4%, compared to last year's 5.9%. The aluminum products segment, 12.8%, versus last year's 6.3%. Manufactured products segment, 3.7%, versus last year's 1.1%. And on a consolidated basis, 5.7%, versus last year's 4.3%. That wraps up the overview of our financial data. I will turn it over now to our Chairman, Ed Crawford.

Good afternoon, ladies and gentlemen. I thought I would address year-to-date and a little glimpse at the balance of the year. If you look at the nine months year over year, although the sales are down some 3.5%, the gross profit is up 4% to $2.7 million, and the operating profit is up 28% to $5.7. We continue to be cautious here at Park-Ohio. We are not on green.

We continue to look at each and every one of our accounts on an ongoing basis to make sure that we have the type of relationships and the margins as we proceed into what appears to be the economic upturn. In this period, we are able to continue to emphasize our purchasing initiatives and the cost of goods went down 1 1/2%. Secondly, the SG&A is down approximately 3.7 year over year. This is interesting because it is clearly -- these reductions are in areas where we continue to be very disciplined; ILS, The Rubber Group, and Gamco.

We're pleased at the bank debt. It is down quarter over quarter, you know, the second versus third by some $5 million. And the bank debt for the year is down some $10 million. So we continue to work very closely and -- on all those efforts to make sure that we reach our goal for our year-end number. I would like to talk briefly about each of the operating units. First, aluminum products. This company continues to operate very well. We're finished closing the plant. Our consolidation is finally completed. We're going forward with the plants that we discussed in our previous discussions in Ohio and in Indiana.

The sales were down for year-to-date some $13.2 or 16% under the previous year. But profits were up $3.5 million, or 70%. This is a clear indication that we have put together the right plant, the right sizing. There is tremendous leverage in this particular unit. And we can operate at lower sales at higher margins, and when we grow the revenue base, which is forthcoming, we are pleased to announce that we have been selected by Bosch, which is a German-based $38 billion company to be a supplier to them, a domestic supplier, U.S. domestic supplier of brake cylinders. This is the general first departure from noncritical parts in automobiles and trucks to critical, and we expect to pursue that in the future, moving into other high stress components of the engines and chassis.

So aluminum is again one of our key components, looks very solid, and very promising, year-to-date, and in the future. As we talk about POP, our particle out product, you know, the sales were up some $22.7 million, or approximately 25%, and the operating profit up $3 million dollars or 300%, and I normally don't spend a lot of time talking about individual units, but clearly, we've talked about our [INAUDIBLE] unit, our induction heating unit which is strongly rooted in national, international sales. That is doing very well.

The rubber products segment is -- we're finally completed with the movement of our plants and really absorbed tremendous expenses in consolidating into one tremendous new plant in the Cleveland area. We think this has been on the drawing boards for a number of years, and it has finally completed. But those expenses have been absorbed. We are also in the process of opening up a plant in Shanghai.

This plant will be up and running in the first quarter. What's particularly interesting about this facility is we're going there to follow our current customer, Delphi, people like Federal Mogul and Yusoki. This plant is for production of automobile-grade wire harnesses for the Chinese market, not for export. The smaller units within POP are still challenging. Our forge in Chicago, which is basically a military forge, making products for the F-16 and the Apache helicopter, we have two major presses there, one has been down for some three months, since our 50-pound hammer, and that has impacted that company, but I expect to have that up and running in the next two weeks.

And the forging business, particularly in the military side of it looks very, very strong for the future. We continue to have slow sales in the PMC -- excuse me, the parkcroft [INAUDIBLE] crankshaft combination and simple reality, the cranks for our major customers are about one-half what they were the preceding year, '02, but that looks like there is going to be a turn in that, so that's got a first positive tone to it for a long time. DMC Collin A, this is the company that we make connectors for the oil and gas industry. This has been a very tough business. We've talked about it.

But fortunately, we have been the recipient of some $16.7 million dollars in new orders, for years '04 and '05. Particularly with Dal Tile, one of the large and leading Chinese companies. So we continue to make progress there. So it is a mixed bag in POP. But basically, the companies that are trailing in performance have some bright sides ahead of them.

We turn to ILS. I think ILS is -- when you look at it, from a year overview, you see the sales down from 8.5%. And I want to address in three categories what I think is impacting ILS and none of these are in my view a problem. First, we have -- when you look at year over year, we have the one-time effect of the sale of a business unit that was within ILS, as well as the business line pharmaceutical. We talked about that, that finally has come to an end, and secondly, we continue, and will continue to concentrate on particular segments of the business that we believe have long-term potential both not in margin but in growth, as we try to begin capitalizing the fact, and the enormous leverage we have in the -- in our ability or our change of trying to do the similar amount of business we were doing in this unit a couple of years ago, with a lot less warehouses.

We are down again, from, you know, last year, we started the year before, we started from down 52 warehouses and we're now to 38. We know we can do considerably more business than we're doing at the current rate. And there was a little bit slower than anticipated sales, quite frankly throughout the whole year, particularly in the third quarter. Trucking is not exactly what we thought it would be. Although it hasn't been, you know, -- as we sit here today, it hasn't been any loss of any business. We continue to operate.

But the semiconductor industry is also something that has underperformed from our viewpoint and then I guess the general economy and the fact that we, in fact again, have not gone green on this company. We are again running the company with an eye towards control and cost initiatives. And we know the revenue is coming. We only have 10 million shares in this company. That is an important issue because as we take and gauge the revenue with this company with the leverage and the button-down cost that we have, we are going to be -- do very well as we head into the future.

I'm estimating the year-end EPS to be somewhere between 70 to 80 cents on a pro-forma basis. Last year, that was 41 for the complete year. So -- and we're at 48 for this year, so if you run the math, it is pretty easy to see that we expect a strong fourth quarter, not only in revenue but in sales. So I believe that we continue to face the individual challenges, but among the key units, ILS is still a terrific company, with a lot of upside, the aluminum side is great.

We have the pieces of the puzzle. We've got the costs under control. We have not gotten overconfident. But clearly, if you see -- with based on our costs and where we are today and the potential we have on our businesses from the revenue standpoint, we have a bright future ahead for the company. I will be glad to answer any questions.

Thank you. At this time we are ready to begin the question-and-answer session of the conference. If you would like to ask a question, please press star one on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, you may press star two. Once again, to ask your question, please press star one. Our first question comes from Sara Thompson of Lehman Brothers.

Hi, good afternoon.

Good afternoon, sara. How are you today?

Good, thank you. A couple of questions for you. What would you say your 70 to 80 cents EPS guidance translates into on an EBITDA basis?

Do we want to cross over to this?

We're somewhat restricted in our ability to talk about EBITDA because of the deed under the new regulations to...

To back into it?

To back into it.

Okay.

But it is roughly a $2.5 to $3.5 million net income.

Okay. Let me ask it differently because I guess I'm not sure what your tax basis is going to be. What would you say, since this won't have any issue with GAAP, what would you say that backs into on an ebit basis?

Sara, I'm going to have to compute that number and give it to you. I've looked at it but that one is not directly in front of me.

Let me tell you where I'm going with. It I'm coming up with something in the low 50s for EBITDA, like 53, 54, 52, somewhere in there and I think you had, unless I'm way off on my calculations, I think you guys originally had talked about something in the high 50s, low 60s so I'm just wondering is it all the shortfall in ILS? You know, it sounds like, obviously, the semiconductor was a little weaker this quarter. The trucking was a little weaker this quarter. But I'm trying to get a better sense of kind of the miss from your prior expectations.

Well, the prior expectations, Sara, number one, the year is not over, let me start by that, okay? And secondly, if you want to look at it for the first nine months, clearly the -- the ramp-up in the semiconductor industry which we have talked about now all year is finally materializing in the first quarter of '04, based on the releases and the energy we're feeling from our customers. So what we expect it, in the semiconductor business, as early and talked about it in the first quarter, did not materialize, and probably will not materialize in any meaningful way until '04. Secondly, the trucking business is not rebounded to the level that we expect it and that would speak to the ILS.

And clearly, we have a huge investment in facilities and capabilities to furnish both those industries. And we have not been the -- been the benefactor of that. Clearly, if you want to slip up and I will break it down into categories, in the POP group, you would have to address the -- our forging businesses, we continue to talk about that. There has been no pickup at all in the crankshaft business. We anticipated that. There were a number of large orders floating around that should have been awarded this year to some of our customers. That has not happened. That doesn't mean the orders have gone away.

It just means it is not there at this juncture and I think that is along with our major forge being down in Chicago. I mean that will affect the company alone in sales close to $5 million. Just the loss of sales for that press being down for some four months. So that's the big highlights of the -- you know, what we expected. And if there is going to be any difference between the number that was out there at the beginning of the year, and I will use your numbers, you know, high 50s, low 60s, and this year is not over, but the short fall, if there is a short fall, there probably will be, will be clearly definable in the areas that I'm talking about.

Okay. Now, that's really helpful. Thank you. And then just a couple of quick housekeeping questions. What was your CapEx for the quarter?

CapEx for the quarter, our total CapEx through nine months was 8.3.

Okay. I can subtract it. That's fine.

And then Sara, we are dramatically under our projected number. We will be for the year. We will do better on CapEx than we anticipated.

Do you have a new estimate for that?

No, but we should be better.

Okay. And then last question, or last two questions for you, do you have cash flow from operations for the nine months and then revolver availability?

Well, the cash flows, we won't give you, the revolver we can give you an estimate of that, it is substantial.

Yeah.

You want to take a shot at that?

Yeah, we're -- our borrowings against the bank line, as of the end of the second quarter were $104.5 million -- third quarter, rather, was $104.5 million. When you factor in that, plus things like reserves, for letters of credit, we've got approximately $40 million of excess availability based on the bank credit agreement as it stands.

Okay. Perfect. Thank you very much. That's all I had.

Thank you.

Our next question comes from Cathy Nolan of Salomon Asset Management.

Yes, good afternoon. Could you discuss in a bit more detail the decline in revenue in the ILS segment, please?

Well, again, I wanted to bring that into three categories. Number one, and Rich, why don't you explain the sale of the business unit, and the pharmaceutical line, as we try to get some clarity to the -- and again, this is a one-time event. Rich?

Yeah, and you will note, when you're looking at the comparative numbers in ILS, there are two pieces which were in place on a fairly large scale in the third quarter of 2002 which are absent in the third quarter of 2003. Those are the -- what we referred to as the pharmaceutical logistics business line which had been sold off in a transaction which continued to have revenues and earnings through third quarter of last year. And then there was a business unit within ILS which was divested early last year. And between those two pieces, we -- the business unit being green bearing, and those two -- those two pieces together were approximately $9 million.

$9 million of the $15 million decline? And they are not -- you didn't restate your numbers for the sale of that business unit as a discontinued operation?

I'm sorry. You said the 9 of 15.

Right.

$9 million year to date.

Oh,.

So 9 -- compare -- 9 of the 26 is the effect of that.

What was it in the quarter?

The quarter, it was about 4.5.

Okay. And the remaining is just due to a slow-down in the business then?

No, I think that -- I want to bring in two additional categories, we have -- Cathy, we've reduced this business from having 52 warehouses to having 38 warehouses. In that process, there is, you know, a number of accounts that as we close warehouses, we chose not to take forward with us. We continued to remodel logistics towards a profile that indicates, you know, that a lot of small customers will not fit in it, and a lot of small customers and a lot of warehouses add up to sales. And I mean we're down from 52 to 38 locations, so you could easily take of the 26, possibly a similar number, like Rich has had out here for the pharmaceutical business, that is an awful lot of sales that we walked away from.

But clearly, you know, we have not lost any significant customers in the ILS business, okay? So it is -- the business unit's one time, it is the finishing and getting ready for the revenue enhancement, we have finally completed our housecleaning, and house reshaping, of all the warehouses. We will go forward with the 38 warehouses. But that's another piece of it. And then again, the slowdown or anticipated upbeat in trucking and particularly semi.

With respect to trucking, the numbers that we follow obviously are, you know, orders of new class A truck, and those numbers seem to be encouraging. And I guess for your business, you say that trucking has been disappointing. What numbers should we be following to kind of ascertain or determine how your trucking -- the trucking side of your business is going? Because I guess we're not seeing trucking being that weak. So what should we be looking at?

I'm saying it is weak, okay?

Uh-huh.

We have a substantial position in the trucking industry and it has not, although you can read all the reports you would like to, it has not, you know, really started to impact in any material way, the revenue side. It is really kind of really weak on a historical basis. I mean you've got to think about what this company was doing and what we're accustomed, as our largest segment in our business, ILS, is -- is the trucking, that's our biggest commitment. It is areas where we're carrying warehouses and expenses, particularly those dedicated to that, but it is not coming back as quickly as your reports might indicate but it is on its way back.

Why do you think that is?

I don't know what report you're reading.

Well, just in the net order, the monthly order rates of class A trucks, medium trucks.

Well, I couldn't possibly, Cathy, comment on that. You know, we have a very, very close relationship with virtually everyone in this business, and I can only comment on where sales are today, versus where they were last year and where they have been historically and where we're thinking they're going in the future.

Can you tell me, based on the bank covenant, what your debt service coverage ratio was at the end of the September quarter?

We haven't submitted that number to the bank yet, but it will be substantially in excess of our -- of the minimum required.

And is that the most binding or constraining covenant in your credit agreement, with respect to availability under your revolver?

Cathy, if you -- we would like to allow for some other people to get on the line. Any of these questions you have, you know, in this kind of depth, we -- I would encourage you to call Richard Elliott as soon as the conference is over and we will be more than happy to answer any list of questions you have.

Okay.

Okay? Thank you very much.

Our next question comes from John Balm, private investor.

Good morning, gentlemen.

Hi, John. How are you?

Let's see. A couple quick questions right here. You already covered CapEx. Interest rate on the revolver, I know it is LIBOR based. What is the -- what is the LIBOR metric? Is it three month, six month?

Well, we can borrow a variety of different maturities as we manage our trenches of debt, anywhere from one to six months.

Okay. Is the interest rate as set forth in the third quarter, would that be reflective of what we see the fourth quarter, that is to say, were there any refinancing costs included in the third quarter interest expense number with the new revolver?

In the interest expense number, they're amortized.

Okay.

For the life of the loan so what you see in the third is reasonably representative of what you would see in the fourth quarter.

All right. A different topic. Is there any -- are there any prepayment penalties on the 9.25% subordinated note? What I'm driving at, with any free cash flow, are you guying able to pay those down at all, or not?

Well, there's a penalty through '05. And at '05, we can pick them out at face value, I believe, that's the year.

Okay. The -- I've had difficulties in computing your tax rate. I know you've got the tax loss carry forward on federal. Do you guys have an estimate what the state, local and foreign tax rates are going to be? I've seen 17%, 20%. What can we look at for the full year?

It sounds like you're getting into a number of fairly detailed questions. I would be happy to walk through some answers to those offline.

Okay. Let's see. And one last one, also. Will there be any requirement for expensing options this year or not, in the SG&A?

There's no mandated requirement to do so, no.

Okay. All right. Thank you.

Thank you.

At this time, there are no further questions.

Well, thank you, ladies and gentlemen. Look forward to convening at the end of the fourth quarter. And I believe that we're going to have -- we're on the right track here, and I think our company will continue to perform well into the future. Thank you very much. And good day.