Park Ohio Holdings Corp (PKOH) 2004 Q1 法說會逐字稿

Good morning. Welcome to the Park Ohio 2004 first quarter results conference call. At this time all participants have been placed on a listen-only mode. After the presentation, the company will conduct a question and answer session. Today's conference is also being recorded. If you have any objections you may disconnect at this time. Before the conference call begins, remember 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 may materially change their actual results from those projected. A list of relevant factors may be found in the earnings press release, as well as in the company's 2003 10-K. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, the company may discuss EBITDA. EBITDA is not a measure of performance under generally accepted accounting principles, and is considered a non-GAAP financial 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 a reconciliation from income before income taxes to EBITDA, please refer to the company's current report on form 8-K furnished to the SEC on May 11th, 2004. Now, the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer, Mr. Matthew V. Crawford, President and Chief Operating Officer, and Mr. Richard P. Elliott, Vice President and Chief Financial Officer. Gentlemen, you may begin.

Good morning, ladies and gentlemen. Ed Crawford, Chairman and Chief Executive Officer. I would like to turn over a review of the first quarter results to Matt Crawford, President and Chief Operating Officer. Matt. Hello and good morning, everyone. This is Matt Crawford speaking. I want to touch on the revenue for the first quarter. We are pleased with the $38 million year-over-year increase, which is a 24% increase from 2003.

Clearly a significant part of this pickup was the activity in the -- or the recovery in the overall global economic environment, but also we are beginning to see strides towards our strategy during the last 24 months to add new volume related to the development of new customers, new products, and, of course, our strategy always to increase market share with our current customers.

Specifically at ILS, we saw a 25.9% increase year-over-year. That was driven largely by the truck industry, which we have a dominant market share. Our strategy to increase content to our current customers and increase market share has resulted in a 83% increase year-over-year, or a 42% increase from the fourth quarter of 2003.

Another industry category we talk a lot about is semiconductor. We've invested heavily over the last 18 months, and are starting to see the results of that. Sequentially over the fourth quarter we saw 67% increase in revenue.

Other areas we don't talk about as much but were significant in the improvement in the first quarter revenue results, was the lawn and garden segment which saw a 12.5% increase year-over-year, and our industrial equipment sector which is primarily HVAC, construction, and agricultural, saw a 31% increase year-over-year.

On our new customer front, quoting activity continues to be very robust. We signed approximately 8 to $10 million worth of new annual volume contracts in the first quarter. Our ongoing quoting activity proves that the ILS outsourcing concept continues to be right place right time.

On the aluminum products front, we saw a 15% year-over-year increase in revenue. Largely that had to do with some new products in the agricultural and medium truck markets. We continue to try and invest in new markets in what is largely an automotive based group of customers. Secondly we saw new volume or even unexpected volume I would say, on some of our critical platforms, with some of our products going to Chrysler. We were added on the Hemi engine, and at Ford we had some success on some of our current products being added to the F-series truck lines which we are pleased with.

In the manufacturing products group we saw 26.2% revenue increase, largely due to the continued success at Ajax Tocco Magnethermic. We saw a substantial revenue increase year-over-year of 46% there as that company continues to ride the wave of increased capital investment in the global steel industry.

One thing of note, the Ohio crankshaft part of the forging group had a very healthy first quarter, which is significant because that was a topic of much -- much concern last year since the diesel locomotive part of our customer base was struggling. We are seeing a healthy increase there which has showed up as I will talk about in a minute on our margin.

On the margin side when I talk specifically to the operating income numbers, we saw a healthy increase of 6% to 6.5% for the entire company. We thought that was -- we were satisfied with that. Specifically, ILS saw an increase in operating income percentage from 6.3% to 7.9%. That had largely to do with our ongoing strategy of increasing our content of greater value parts to our current customers.

We also continue to be vigilant on the cost reduction side, closing an additional four warehouses. That is substantial, considering that our volumes hit a high water mark for the last couple years. We also continue to focus on productivity improvements. We continue to leverage technology, and I think one of the ways in which we measure that is our ability to increase sales per employee. Last year in the first quarter we did about $450,000 per employee of revenue. This year's first quarter we did about $523,000 worth of sales per, so we're excited about that number.

Secondly, margin on the aluminum products group. Despite the increase in sales, we lost significant margin here. Moving from a 14.9% to a 5.8%. I'd certainly like to mention that 14.9% last year was probably what we could expect to be the high end of the range for the operating margin for this group.

Having said that, 5.8% is significantly below where we would like to be. This largely had to do with the increased spike in volume, as I mentioned, was in some cases a little bit unexpected. We incurred a product mix which was -- did not benefit our margin, and had overtime costs, mold costs and tooling costs that were unexpected and also resulted in some excess scrap which we are not pleased with but we are getting our arms around it and anticipate that we will move that margin substantially north from that 5.8% going forward during this year.

Lastly, margin in the manufactured products group had a nice move from 3% to 6.8% driven largely by the forge group. The improved margins there due to the increased volume with our diesel locomotive customers, as well as the cost improvements related to the restructuring that we talked about at the end of 2003.

Lastly, I'd like to mention that our new investment in Southwest Steel Products, a new forging plant that we have built over the last 18 months down in Arkansas, we have worked substantially through those startup costs, and the first quarter showed our first significant stride towards the profitability which we expect in the near term at Southwest Steel.

With that, I will turn it back over to our Chairman and CEO, Ed Crawford. Before I touch on future successes and opportunities, I want to emphasize our continuing effort here at Park Ohio to control expenses and capital spending. Operationally, as the President mentioned, we are achieving higher revenue with fewer employees, fewer factories. Most importantly, on the ILS side, we are handling this rather dramatic increase in quarterly revenue through fewer warehouses. The last time we saw this type of volume in ILS we had 50 locations. Today we have 38. This has been an important part of the last two years of remodeling and restructuring the company. We believe that the velocity through individual warehouse is the key to the revenue enhancement, but more important to the profit from the additional revenues.

We are also continuing to concentrate on the working capital. We had a modest increase in the first quarter of some $3.4 million over year end. And we have at the last count in excess of $52 million availability. Segment review. Gen Aluminum is still a very strong part of the future. We are currently in negotiation with an international company, not only to cast, but to machine master cylinder brake parts for this particular company.

We've announced previously that we intend to get into the critical component nature of the aluminum business. This is our first step, it's a big step, and it is with the type of companies that we are accustomed to dealing with in long-term relationships. As far as manufactured products are concerned, our plant is up and running in China. Matt and I were there for the opening.

I want to point out that 100% of the production being manufactured in that facility is dedicated to our current customers and their customers in Asia, particularly China and Japan. So we're going there following our customers, supplying them the type of automobile quality and truck quality necessary.

We are also, out of the same location, have service centers for a pipe machinery division, which has extensive opportunities in oil and drilling in Russia and China. Ajax Magnethermic is there for the service of all the particular steel companies, like [Bow] who is one of our largest customers. And most important, in the future we plan to go back in November and begin to introducing in China the logistics supply chain management system that we have been so successful in America. This is an important part of the future of this company.

As far as ILS is concerned, we are the benefactors, particularly in the first quarter, of our willingness to stay in and support and develop when the times were very, very bleak in the semiconductor industry, to stay there, open warehouses and support companies that lead this industry with warehouses, and today the volume and the velocity is moving through those warehouses, and is a dividend and investment we made last year and the year before and expensed with an eye towards the future and the future is now.

And again, we maintained our capabilities in the trucking industry, again, expensive but we were prepared and ready to ramp up with go with two companies, two industries. Particularly the semiconductor industry and trucking, that go from a walk in the sun to a full sprint. We were pleased with our willingness to stay in, and invest in the future with great customers.

It is clearly evident by the first quarter results we're off to a great start. I think we're doing better than some had expected However, we feel it will be -- it's too early to comment on the balance of '04. But we have spent a lot of time positioning ourselves. We talked the last conference and the conference before that we restructured this company and prepared it to take advantage of increased revenue.

I think the first quarter is a result of what we can do, you know, in the future, with this company based on the changes, the cost containment and disciplines we have shown in the last two years. So this is about revenue enhancement, and we feel strongly we have the wind at our back. I'm prepared to answer any questions.

Thank you. The floor is now open for questions. If you do have a question, press star one on your touch tone telephone at this time. If at any point your question is answered, you may remove your from the queue by pressing the pound key. Questions will be taken in the order that they are received. And we do ask that while posing your question, you please pick up your handset to ensure proper sound quality. Once again to ask a question at this time, please press star one on your touch tone telephone. Our first question today is coming from Kathy Noland of Salomon capital. Please pose your question.

Yes, good morning.

Good morning, Kathy.

Can you, with respect to the very nice sales increase in the first quarter year-over-year, was there any benefit from foreign exchange translation in that? Or is that a true volume growth?

True volume, no currency.

No currency, okay. And another question quickly. In the ILS segment, does the company's customer base include manufacturers of medium duty truck or is that exclusively heavy duty?

A broad range of both truck and buses, so it is not just heavy duty. It is not all Class 8 and 9. It is 5 and above.

Okay. And then my last question is with respect to the aluminum products group, can you give us a sense for what your target operating margins may be in that area?

That's Matt. Yes, we anticipate that that business should be able to run in the low double digits at the operating income line margin.

Low double digit?

Correct.

Okay. And also just some housekeeping items. I don't think the press release contains information about capex for the first quarter. If it does I'm sorry if I missed that. Perhaps you could go over that.

Capital expenditures in the first quarter were $2.2 million.

Thank you.

The next question is coming from Ephraim Fields of Clear Lake. Please pose your question.

Good morning and congratulations on a terrific quarter.

Thank you.

Just a follow-up on some of the questions that the last person asked. Can you give us a sense of what you anticipate capex being for the full year?

Approximately $13 million.

$13 million.

Which is reflective of the last two years.

Right, okay. And the -- just to refresh my memory in terms of what type of seasonality, if any, you typically see in this business, both in terms of a revenue and a margin basis.

Historically the first and fourth quarters have been outstanding quarters. The third has always been iffy primarily because you have the auto slowdown, particularly in the third quarter, and it is hard to anticipate that. But generally speaking, our strongest quarters are one and four. The second quarter is normally very good, and the third quarter is the one that is a little hard to pin down because we just don't know how quickly the auto backs away. They have a two week shutdown in July. They have some way, depending on how many cars they have in inventory worldwide, or at least in North America. They slow it down for a month or they slow it down for two weeks and that is really what makes the difference.

Right. In terms of the $15 million of cost savings that you guys have implemented, is that fully reflected in these numbers at present or are there still more initiatives that you plan to take?

What 50? What 50 are you referring to.

15. 1-5.

Oh, 15. Yeah, yes. They are.

Okay.

And clearly -- I'm sorry, you're referring to the $15 million that we indicated during the restructuring part of the conversation at the end of the fourth quarter?

Yes, I am.

As we indicated in that conference call, we anticipate saving approximately $15 million over the next three years, excuse me, the next five years, but that was not linear in the sense that we would not achieve as much in the first year. We are on a pace to save something less than $3 million in calendar 2004.

Terrific. And my final question just has to do with your pension. I know you generate some pension income or I believe you did last year. Do you anticipate doing the same thing this year, some noncash pension income?

Yes, that's the case.

Okay. Allright. Thank you very much.

Thank you.

Once again, to ask a question at this time, please press star one on your touch tone telephone. We have another question coming from Kathy Noland of Salomon Capital. Please pose your question.

Yes, good morning. This is a follow-up on the pension question. You have pension income, but are there any pension, cash pension funding requirements this year?

We are not in a position to have to do any cash pension funding.

Is that the case for 2005 as well?

I'm not prepared to comment on that at this point. There is nothing that would say that we would, but it is too early to comment.

But clearly nothing for 2004?

That's correct.

Okay. Thank you.

The next question today is coming from John Baum. Sir, please state your affiliation and pose your question.

Shareholder. Congratulations, guys. Great quarter. Looking forward to seeing you at the annual meeting. What was the interest rate on the revolver for the first quarter, please?

We're at 200 basis points over LIBOR which runs a hair over 3%.

Do you anticipate that in your projections, do you anticipate that going up this year?

Clearly everyone is seeing a future interest rate rise. There is lots of differences of opinion as to how much.

Granted. Do you anticipate paying down any on the revolver this year? Do you have any year end projections on taking down the revolver debt?

Well, that is largely based on the revenue for the year, the total revenue if it continues to perk along like it is, that would probably be unlikely. But the results will be more than offsetting.

Any plans I think I have asked this before, I don't recall the answer, any plans for refinancing the 9.25% senior subordinated notes?

Hi, John, this is Matt Crawford. You know, we constantly look at those markets. We are -- are very interested in refinancing those at the right time. As you may know, we will incur a -- a substantial call premium at this juncture. That changes or steps down significantly at the end of the year. You know, clearly we're not waiting necessarily for the end of the year. All I can tell you is we really do look at the markets and recognize that that is something that stands in front of us for '07 that we have to do something about.

Are those bonds still trading at a premium over par right now?

That is my understanding, yes. Further, John, this is Ed Crawford. We have attended one in the last month and we are going be attending another bond conference so we are active in the marketplace presenting our story. So they're quite aware of that.

Thank you. One last thing. I understand the public nature of the conference call and you don't want to do too much, you know, ramping up right here, but do you have visibility looking forward in '04 as to whether or not, because this seems -- the thing seems really to be revenue driven, do you have visibility in '04 as far as you came out at 8-10%, you blew the doors off in the first quarter? Are you hesitant to look a little further? Is it second, third, fourth quarter thing? Can you look into '05, is this really happening. What do you see for sales growth?

We really can't comment on that. We're optimistic here, but I think there is a clear tendency for this company to follow the general economic upturn in business on the revenue side.

Okay. This is a technical question for accounting principles. At what point can you put the 20 -- I think it is roughly about $20 million of deferred tax assets that you have not been able to put into book value. Will that be able to be taken back into book value this year?

No, not this year.

Thank you.

Once again, if you do have a question at this time, please press star one on your touch tone telephone. Gentlemen, there appear to be no further questions at this time. Do you have any closing comments?

Yes, thank you very much, ladies and gentlemen for the continued support. We believe we are in the right place at the right time and look forward to the balance of the year. Thank you, again.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.