Park Ohio Holdings Corp (PKOH) 2003 Q4 法說會逐字稿

Good morning, and welcome to the Park Ohio 2003 year end results conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. To ask a question, please press star then one.

Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

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

Additionally, the Company may discuss EBITDA. EBITDA is not a measure of performance under generally accepted accounting principles and is considered a non-GAAP measure as defined by the SEC. The Company may present EBITDA because management believes that EBITDA could be useful to investors as an indication of their ability to incur and service debt, and because EBITDA is a measure used under their credit facility to determine whether they may incur additional debt under such facility. For reconciliation from income before income taxion to EBITDA, please refer to their current report on form 8-K, furnished to the SEC on March 10, 2004.

Now I will turn the meeting over to Mr. Edward S. Crawford, Chairman and Chief Executive Officer; Mr. Richard P. Elliott, Vice President and Chief Financial Officer; and Mr. Matthew V. Crawford, President and Chief Operating Officer. Gentlemen, you may begin.

Good morning. This is Richard Elliott, the Chief Financial Officer.

I will now provide an overview of financial results for fourth quarter and full year 2003. As you know from our press release, the Company restructured the forge group. I'll summarize financial results, excluding restructuring charges, then discuss the charges by themselves.

First, performance for full year 2003 compared to 2002, excluding restructuring and impairment charges. First net sales: the ILS segment recorded $377,645,000 of sales in 2003, compared to $398,141,000 in 2002. That's a decrease of $20,496,000. I would note that more than half of that related to divested businesses.

Aluminum products net sales in 2003 were $90,080,000, compared to $106,148,000 in 2002, a reduction of $16,068,000 related to the shutting down of two sand casting plants in previous years. The manufactured products segment recorded $156,570,000 of sales in 2003, compared to $130,166,000 in 2002, an increase of $26,404,000. Those are respectively growth rates of 5.1%, -- I'm sorry a decrease of 5.1% for ILS, 15.1% for aluminum products, and a growth rate of 20.3% for manufactured products.

On a consolidated basis, net sales for 2003 were $624,295 -- $624,295,000, compared to 2002, $634,455,000, a decrease of $10,160,000, or 1.06%. Consolidate gross profit for 2003 was $97,346,000, compared to 2002, $93,187,000, an increase of $4,159,000, or 4.5%. Those reflect 2003 gross margin percentage of 15.6%, as compared to 2002 gross margin of 14.7%.

In terms of operating income, which is EBIT, the integrated logistics solutions segment recorded $24,893,000 in 2003, compared to $26,501,000 in 2002, a reduction of $1,608,000, or 6.1%. This is an operating income percentage of 6.6% in 2003, compared to 6.7% in 2002.

The aluminum products group recorded $10,368,000 of operating income in 2003, compared to $8,336,000 in 2002, an increase of $2,032,000, or 24.4%. The manufactured products debt reflected an 11.5% operating income, as compared to 7.9% operating income. The manufactured products segment recorded $5,519,000 of operating income in 2003, compared to $4,717,000 in 2002, an increase of $802,000 or 17%, reflecting operating income percentage of 3.5% in 2003, compared to 3.6% in 2002.

On a consolidated basis that represented $34,679,000 of operating income in 2003, compared to $35,356,000 in 2002, a reduction of $677,000, or 1.9%. Those reflect operating income percentages of 5.6% in both years.

Now performance for quarter four 2003, compared to the same quarter in 2002, again excluding restructuring and asset impairment charges. Net sales ILS $99,333,000, compared to $93,630,000 in 2002, that's an increase of $5,703,000 or 6.1%. Aluminum products segment recorded $22,061,000 sales compared to $24,916,000 sales last year, a reduction of $2,855,000 or 11.5%. Manufactured products segment recorded $41,305,000 sales in the fourth quarter, compared to $37,609,000 in fourth quarter of the prior year, again an increase of $3,696,000 or 9.8%.

On a consolidated basis, Q4 sales in 2003 were $162,699,000, compared to $156,155,000 last year, an increase of $6,544,000 or 4.2%. Consolidated gross profit was $25,337,000 in Q4 2003, compared to $23,916,000 the same quarter last year, the change, the increase was $1,421,000, or 5.9%. Operating income ILS recorded fourth quarter operating income of $6,961,000 compared to $5,425,000 last year, for an increase of $1,536,000 or 28.3%.

Aluminum products recorded $1,667,000 operating income this quarter compared to $3,080,000 same quarter last year, for a decrease of $1,413,000 or 45.9%. Manufactured products recorded $1,210,000 of operating income in the fourth quarter, compared to $1,568,000 last year, a decrease of $358,000, or 22.8%. The relevant operating income percentages were: ILS 7% last year, -- 7% in 2003 compared to 5.8% in 2002; aluminum products 7.6% in 2003, compared to 12.4% in 2002; and manufactured products 2.9% in 2003, compared to 4.2% in 2002. All of those for the fourth quarter.

On a consolidated operating income basis, we recorded $8,378,000 in the fourth quarter compared to $9,570,000 in the fourth quarter of last year, reduction of $1,192,000, or 12.5%; and operating income of 5.1%, as opposed to 6.1%. Provide a sequential look, there are a few key comparisons of the fourth quarter with the immediately preceding quarter. Sales increased by 11%, and excluding restructuring, gross profit increased by 16%, and EBIT increased by 24%.

Now, the fourth quarter restructured charge, management has now acted to complete the restructuring of the company's forge group. Previous quarterly calls predicted the likelihood of such restructuring. Our chairman, Ed Crawford will discuss the actions taken and expected benefits. I'll simply note now that we expect improvements in both earnings and cash flow of $15 million over five years.

In connection with these actions, in the fourth quarter of 2003, the Company recorded a charge of $19.4 million. These fourth quarter charges were entirely non-cash. In our financial statements, $600,000 of the quarter 4 charge is included in cost of products sold, while $18.8 million is shown as on a separate restructuring and impairment charges line.

This restructuring charge can be summarized as follows. $17.5 million of the charge relates to forge group restructuring, and $1.9 million of the charge, outside the forge group, consist primarily of additional pension withdrawal charges.

That wraps up the overview of our financial data. I'll turn it over now to our Chairman, Ed Crawford.

Good morning, ladies and gentlemen.

'03, we look at the numbers seem somewhat modest with sales being virtually flat. We're pleased that net income was up some 12%, and earnings per share up some 11%. I look at '03 as part of the three very, very difficult years we have worked our way through as we've restructured the Company and prepared it for the future. 01, you know, 02 and 03. We've been positioning ourselves for what I'd like to call a control assent in sales and profitability.

What's very important, again, when you address '03 is our ability to restructure the bank debt. This is a very important part of preparing for the future. As we sit here today, we have availability in excess of $50 million. This is the working capital that's going to be required for the future as the revenue side of the business becomes energized, and today having availability, having the banking relationships in place as we prepare for the upturn in the economy is very, very important.

We consider that quite an accomplishment in our '03 efforts. We have a pricing grid that, quite frankly, the Company has moved along at such a pace here relative to bank reduction of debt and so forth and the debt from year-over-year from 114 to 101. So we have in place the availability. The pricing grid, based on the performance of the Company, just ratcheted down one more notch. The equity has responded as we prepare the Company for the future and the bonds are trading over par.

Clearly, part of the preparation for the future of this company beginning in '04 as we ratchet up the revenue side of the business is preparing to take advantage and increase the profits of the Company as the revenue enhances itself. Availability, a solid banking relationship was an important part and important goal in '03. That has been accomplished. We prepare on that side to grow.

I'd like to take a couple, address a couple of the individual units starting with the ILS unit. We had a very, very big win when we were awarded this, the contract Volvo Mac contract. Although it's been here for a while, understand we had the Max side of the relationship, Volvo acquired Mac, and we went head to head with every logistics company in the world and we were awarded that. We're proud of that.

The two parts of the business we've talk about continually that could really impact ILS quickly and in a very positive fashion is the semiconductor industry and trucking. We all can see, and we're all very, very pleased that the beginning of the Class A trucking, particularly, has really ratcheted up and looks very, very promising for a couple years or more; and the semiconductor industry in our relationship with our major account particularly, is outstanding. We are going door to door in our warehouse in Austin, 24-7 servicing that particular company, and we've been expanding our products with those and of our position now to enter into relationships at other semiconductor-related companies. So ILS, again, across-the-board we'll follow the economy, but when semiconductors goes up and trucking go up, we go with it. So that looks very good for the Company from an ILS standpoint.

The aluminum business, you know, we'd like to talk about wins here because this is where we are. I think we're in the right place at right with the momentum. We are now a supplier to Bosch, a German company. We are the second supplier to be selected by this company, not only for products domestically but worldwide. We've stepped to all the quality questions. Bosch is the world leader in brake cylinders, or breaking systems, so we feel very good about that relationship.

We also have been fortunate to begin doing additional machining for Ford Motor as they begin to outsource some of their machining. This is -- we've been doing part of it. It's been what we call the pre-machining, then we would send it to them and then they would do the finish machining, so we've stepped up a notch so that will be reflective.

We're completely finished with the Gamco [ph], or General Aluminum, restructuring particularly in the fourth quarter. We finished the closing of the -- or the final plant in Houghton, Michigan, with relative cost, but we're down from five plants to two plants. You'll begin to see the revenue begin to grow there. Again, it'll be flat the first part of '03 relatively year-over-year, but new contracts with Bosch and Ford and others, that is back on stream and is going the right direction. I think, you know, I don't want to get any of my operating people upset there. We actually have three an aluminum plants, not two, so anybody that's listening from the operating side, I apologize, but from five plants to three plants.

As far as Park Ohio products, great news there. On the PMC Collin A [ph]side, that's the company that specializes in the manufacturing equipment for the oil and gas industry, right now that business has really hurt us for the last couple years at the EBIT side. We are sitting on now a backlog in excess of $15 million in products for -- and I recently was in China to our biggest company in Tiangen, the Pikeman [ph] Corporation. There's new orders there in the backlog, and that unit is in excess of $15 million.

That is going to be a very, very exciting part of this company. We've -- that company has lost money two years in a row. It was hugely profitable. It's really something connected to the cycle, but, again, we're in the right place at the right time and oil and gas in China and Russia. This is -- there's a lot of good things coming out of PMC Collin A.

Our induction company, Ajax Taco Induction [ph], looks very, very solid. I'll comment on China and our activities there in a moment.

So when you look at the Company's -- collectively the main companies ILS will run with the revenue generally. A lot of extra things happening in semi and truck. We've been waiting for a long time, particularly for semi.

The aluminum business is fine, particularly with new accounts like Bosch and over in the POP side, ones that will really affect that particular segment will be the induction with companies, like Bow Steel in China and others.

Matt and I were just recently there, and the activity in the steel business in China and India is just hard to believe as they continue to build plants. As explained to me by one the leading managers of Bow Steel, the largest -- third largest steel company in the world, who keeps increasing capacity, not for export to America but just for internal consumption. And they're drilling for gas and oil in China and Russia and India, the automobile business is starting to ramp-up so we've got a good position internationally for the future.

Now down to, let me cover this, the final, the last chapter of the -- of our position in the forging industry. As we remember, a couple years ago the strength in our forging company, we moved the landing gear portion of the business, the forging part, to Chicago to crop. Fortunately, we have as now the aerospace business is starting to pick up. At crop in Chicago, and that's where we do all the aerospace business and where we do the military.

So we decided and we were successful in getting the contract from EMD, our customer on the diesel locomotives, and we received a five-year committment from EMD, and that business is really ramping up. Two years ago they hit the bottom, of like 205 locomotives for the year. This year it's over 600. But it was clearly, we were not competitive worldwide in the manufacturing of the forging necessary for that particular product.

So rather than reinvesting, and this is a company that's been losing money continually for the last three years. Instead of reinvesting, we went on to a world sourcing. We contacted every forging company in the world that could manufacture this product, and we were pleased to find not one, but two companies, that could produce the forging for us at lower cost than our internal cost. So the decision was made to face, what I consider the last under performing asset base in the Company, and there was a tremendous amount of effort put into making this and we just cannot compete on our equipment without making a substantial investment.

The bottom line is, you know, we've got the EMD contract. It's for five years. The revenue is picking up. We're buying the forgings, and as Mr. Elliott pointed out, this is a $15 million earnings event over the next five years. So, yes, it's a non-cash write-off. Unfortunately, we had to make this decision, but from a business view point we've got the customer, we've got the business, we have the machining capabilities that are necessary without any investment, and I chose not to go in deeper into investment in capital equipment in the forge to bring it up to commercial standards.

So though it seems like an awful large number, I am, quite frankly, pleased to have it behind us. It will reflect in higher earnings for the company , and non-cash event we're comfortable with it. And, again, I believe that this is the last underperforming asset for assets in the Company.

A brief comment on our China initiative. We have been in China, primarily for the last five or six years, with the thought of buying products, and particularly for ILS and developing suppliers for fasteners and for rubber products and for stampings. That has been successful. However, what we have found out very quickly is if there is capacity over there, it really is not for export. It's for internal consumption. So we've been looking at this closely.

They changed the rules so we were able to, in fact, incorporate our own company in China, it's not a joint venture. We have taken 40,000 square feet, and we have opened what we consider Park Ohio Industrial Mall in Shanghai. The thinking is very simple. It's fairly modest. We have been asked by our customers, our main customers in the rubber side, the Japanese wire harness companies, as well as Packard Delphi, to be in China with our highly technical, very difficult to make wire harnesses for trucks and auto. To be in China, to supply them there.

We went there and we have currently have installing four machines. We already have commitments from our customers in sales exceeding $5 million. We're able to convince a major company in the compounding business, PolyOne, to go there with us they're right around the corner. So we're putting together, although modest as it is, a facility there on the rubber harness business that we -- in Cleveland, Ohio, we're doing the same product with the same equipment in Shanghai for our customers for consumption by the auto and truck industry in China.

That is one part of the building. The other part of the building is we have a need, particularly for KMC, PMC Collin A to be there and be in China in the gas and oil business in our threading machines and the parts and the supply and the maintenance is critical. So we have a group there that will be making parts in the building to service people there, to service this industry, particularly Tiangen pipe, and another part of the business, again in our mall, is our induction heating group who supplies Bow Steel in their building the equivalent of five steel mill in this part of the world. And we need service people there, we need parts there.

Both these businesses, PMC Collin A equipment, as well as the induction equipment, they're considerable parts consumption which is very good business for us. But it's parts consumption and service. And I will tell you, Matt and I were there for some 12 days, the customers in China, both the domestic companies or the companies that are owned by the government, as well as the private companies there like Delphi and other, are very excited to have an American company in there.

We don't think this is a big investment from our point. But it's very controlled. It is our company, and it's an important part of doing business in this part of the world. And a personal comment on that, you know, Shanghai to me looks like Paris. It's incredible the buildings they can throw up in one year but this is real. And the market everyone's talking about next is India, and -- but the steel industry, you know, was obviously started in Europe and it moved, that capacity and quality move to America and then from America it moved to Japan. It's moving from Japan to China, and probably in the future India will be the next area.

So when I think about, I think this is -- we came aboard in 1992. I think is the 46th or 47th conference call we've had talking about the Company, and I've never felt better about the future and I think we have the management, we have very good businesses in ILS. We're going to get up on our website a copy of an article that I brought back in the February magazine, magazine logistics magazine from China, there's a nine page article on ILS, and believe me, if anyone our supply chain point of views, product neutral supply chain management system, it's in China. They're very sophisticated in the top end on making raw materials, and they're very good at building cars and trucks, but the flow of material between those two points is non existent.

So we'll be going back there to have a conference in the fall and we can go in with ILS. It's a tremendous opportunity, so between ILS and a solid an aluminum business and induction of pipe machinery and good management, it's come through a very, very difficult period, '01, '02, and '03, and with the support of our bank group, we are prepared, we have the capital, and no one could be excited about the results of this company in '01, '02 and '03, and we're not. But I think after the first quarter and beyond, and you can see that we have talked in our press release about increase in sales growth of 8% to 10%, that is what I would consider in backlog, and an increase of the EPS to $1, $1.10 over the 70 cents.

So thank you for being patient. The bonds holders and equity holders and all of our employees, but now we are not. Matt's here and Rich, and we're prepared to answer questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please star then one. You will be prompted to record your name. To withdraw you request, press star then two.

One moment please for our first question. Our first question comes from Sarah Thompson of Lehman Brothers.

Hi, good morning.

Sara, how are you today?

Good thank you. I just had some questions I guess both on the fourth quarter and on your outlook for next year.

Can you just talk a little bit more about what happened specifically in aluminum products and manufacture products that led the margins to be down so much year-over-year in the fourth quarter?

I think the primarily culprit, if you want to use that word, was Gamco. And the closing of particularly the Hudson, Michigan, plant and other relative activities. That was a large part of that.

And again, the slower than anticipated ramp-up in expenses relative to the plant, the new rubber plant in Cleveland. So forging obviously is kind of the -- this is the last time at bat where they can really hurt us, and as expected, once we decided that we were getting out of that business, the productivity at the facility, the cost relative to it really hurt us.

We were not able to just close the door one day on the forging facility. We had to wind it down towards -- as we brought up our other suppliers, and once the word got out that we were -- without even announcing it -- that we were getting out of the business, quite frankly, we got hurt really at that particular unit in combination of increased scrap and low productivity.

And so it's their last time at bat and as always, I won't say -- it wasn't a pretty picture relative to performance and expenses. So that, Sarah, is in a capsule, the two issues. The aluminum business is -- again, we have, we have the ramp down of one contract as we prepare for the Bosch business, and the Ford machining business. So it was a transition period. It all happened in the fourth quarter, and we're glad to have it behind us.

Okay. So this isn't -- this is something that should be behind that we shouldn't see they repeat in the first quarter?

No, you will not see it repeat in the first quarter.

Okay. And then if you're looking at -- I'm just trying to go off the guidance you gave for 2004. Can you either help me in terms of what does the dollar to dollar kind of equate to in EBITDA or can you give me your tax rate, just so I can back into the number.

I can give you some thoughts on both of those. Because we don't have a reconciliation to the 2004, the FAS tells us that -- the SEC is telling us we can't give you the EBITDA.

However, the -- if you look at 2004, things like interest and DA will generally be pretty comparable to what you were seeing in 2003.

As far as the tax rate, we continue to be paying state and some foreign tax. We don't anticipate paying any federal tax or incurring any federal tax expense provision in 2004.

So taxes probably stay around the a million or two.

Generally in that comparable kind of range, yes.

Okay. Okay. And then just last question.

On the forging earnings and you said $15 million over five years, can you tell me how much you're expecting to get of that in 2004?

Not quite dividing 15, you know, by, you know, five. But there'll be a considerable increase in earnings, you know, year-over-year relative to it. So I don't want to say it's $3 million. But it's not a lot more than $2 million, let's put it that way, as it starts to roll in.

Okay. I guess what I'm just trying to figure out is, I'm kind of back of the envelope coming up with EBITDA, and you don't have to comment on this one way or other, but in the mid-50s for your 2004 guidance, and I'm having trouble understanding if all of these expenses are behind you and, you know, things are looking up for ILS and things are looking up for forging, why your numbers wouldn't be higher. So am I miscalculating EBITDA or is there some offsetting thing that's going to take numbers down in '04?

I think we have, Sarah, presented , the facts pretty accurately, okay? We want to give guidance on this.

I think the guidance that is in the release is fairly modest, you know. So you -- and we can all do our own math on this, but that's where we are at this particular juncture. You know, we hope we can improve on that.

Okay. Fair enough. I'll let somebody --

Sarah, I can -- one thing I can say is, there isn't some hidden lump in there that we're not telling you about.

Okay. So it may just be somewhat conservative. That's fine. That's all I had. Thank you.

Once again, if you would like to ask a question, please press star, then 1 .

Are there any more questions, operator?

At this time there are no further questions, sir.

Well, thank you, ladies and gentlemen. We look forward to having a very upbeat first quarter conference in the near future, and thank you very much for your patience and support.

Today's conference has concluded. You may disconnect at this time.