Park Ohio Holdings Corp (PKOH) 2004 Q2 法說會逐字稿

Good morning and welcome to the Park-Ohio 2004 second-quarter results conference call. At this time, all participants are in 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 a 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 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 July 29, 2004.

Now the meeting will be turned over to Mr. Matthew Crawford, President and Chief Operating Officer. Gentlemen, you make begin.

Good morning everyone and thank you for joining us on our conference call this morning. Let's get right to it. We are pleased with our second-quarter efforts. The overall revenue growth of 26 percent shows a solid strength in all of our major units. The increase in margin at the net income line at 3.3 percent and more importantly at the gross margin line -- or excuse me, the operating income margin of 7 percent both represented not only the strength from the revenue side of the business, but also reflected the ongoing improvement in our business from the restructuring that happened in the prior two years.

Going segment by segment, ILS sales year-over-year, up 19 percent sequentially from the first quarter which is really what we look at here. We were down 1 percent or flat I would say. The reason we were flat although we have been signing new business is there were 3 less ship days in the second quarter. So our average daily shipments were up.

Secondly, the key markets in that business were strong. Tuck continues to be very strong quarter-over-quarter; first to second it stayed relatively flat but that was very strong in the first quarter and we anticipate it will continue to be strong through the rest of the year.

Other areas which we saw some strength, the electrical controls area, very strong. The building area was strong as well. New customer signing, strong again in the second quarter. Activity in the lawn and garden area, certainly truck, our marketshare continues to go up in that area. Lastly we are particularly pleased with the sizable new business in non fastener markets.

On the margin side at ILS, we had an increase in margin year-over-year from 6.5 percent to 7.2. Sequentially we were down slightly from 7.9 in the first quarter to 7.2 in the second as I mentioned. Obviously we're not happy with the decrease in margin from the first quarter. That largely is due to the increase in steel prices globally although we were surprised at the impact or at least the size of the impact. We are in a very good spot because we have, we believe the appropriate amount of leverage globally to not only resource parts where we have been impacted but also to go to our customers and although we have been successful so far in passing some of these costs increases through, we certainly anticipate we will have ongoing strength in that area.

Although it is certainly a short-term problem that impacted the second-quarter efforts we anticipate that we will be able to improve margins or at least keep them flat for the rest of the year.

The second business that we want to talk about, Jamco, sales were up 18 percent year-over-year. They were up 2.5 percent over the first quarter, strong sales across the board in all productlines. New business, we mentioned I think on the first conference call we were working on a sizable block of business at John Deere that has started to come online, so we are happy with that. The second quarter was actually -- we've talked a lot about Bosch (ph) over the last couple of quarters and for the first time, Bosch was meaningful to the sales line and we are happy with how that account is coming along.

From a margin perspective, the margin was down year-over-year from 13.5 percent to 9.7 percent but it was up from the first quarter 5.7 percent to 9.7 percent. We mentioned in the first quarter that we thought 5.7 was a low margin for this business, the operating income line. The reason for that is we had some startup costs relative to Bosch. We had some tooling issues and scrap issues that came from significantly larger volumes than we had expected. Those volumes have stayed with us through the second quarter and grown but we are going a much better job of managing scrap, of managing molds.

We're doing a much better job of doing the same amount of work with much less overtime so the blocking and tackling we talked about doing in the first quarter that we had to do the second quarter to maintain a higher margin is starting to help us.

We do believe, as we mentioned in a first quarter call that last year's margin of 13.5 represented a high watermark for this business. We do anticipate that low double-digit operating income margins are what we expect out of this business and as you can see, we were extremely close to that in the second quarter.

Thirdly, I want to talk about the manufacturing products business. Sales up 46 percent year-over-year, up 19 percent over the first quarter. Strength across the board, but I want to spend a second here talking about what we call the CEG Group, the capital equipment is largely our induction heating business and our pipe threading business which were the very strong. The CEG grouping by itself was up 68 percent year-over-year and 23 percent over the first quarter, significant strength out of Asia for orders from steel companies for the induction heating equipment and pipe threading equipment. We purchased the remaining portion of a Tokyo-based joint venture partner that we had small business but has added a very successful platform for us there. We are excited about that.

Secondly, the forged products group continues to be very strong. Locomotive crank shaft sales are at all-time highs and our aerospace forging shop up in Fitzroy (ph) Illinois, crop forge has a backlog of 1 year right now. They are completely sold out for 1 year and we are working very quickly to add extra room up there to take on some of the new opportunities. We are very excited about that.

We have seen a modest upward tick in our rubber group, as most of you know we have been trying to bring that online for about 18 months and we're starting to get some help from them.

On the margin side, 9 percent up from 6.6 last year; 9 percent up from 6.8 in the first quarter. This is largely due to the factors that I just spoke about; the CEG Group is selling largely mostly the type of proprietary product that comes with much better margin and we are very pleased not only with their efforts in the second-quarter but their outlook for the rest of the year.

Lastly I want to touch a little bit on the balance sheet. We increased debt by 8.3 million during the second quarter. This was largely due to the working capital increase of $17 million. That is an awful lot we know on a modest increase of revenue of 8 million. We think it is a little bit of a misnomer, the CEG Group had a -- the CEG Group I just spoke about had a record-setting second -- excuse me -- June shipments in excess of 20 million. So there is what I will call a lump flowing through our receivables at month end that I think will certainly move quickly, we hope.

On the inventory side, ILS was up a little bit; certainly we were working with in historic lows in the days on hand at the end of the first quarter, largely due to the jump in volume. We had to make some small investments there. I anticipate that we will stay about flat for inventory ILS for the rest of a year. We had some inventory at the end of the quarter also in the pipe threading group as we anticipate some shipments in the third quarter there and our investment in the Jamco, the Tokyo-based company that I talk about caused a small increase in the balance sheet as well as the assets.

Lastly, it is kind of difficult to judge our cash going forward for the rest of the year. We would like -- we have made an effort each quarter to try and tell people where we thought our bank would be at the end of the year. It is very difficult at this point to say because we continue to enjoy very robust activity with our major customers. Although we anticipate to be able to throw off a significant amount of cash in the second half of the year, at this point it is hard to give a specific number.

With that I would like to turn it over to our Chief Executive Officer and my father, Edward Crawford.

You would have to go back 14 quarters or the first half of '00 since the last time our Company has had a $200 million revenue sales quarter. We are pleased to be back at those numbers. It seems a long time ago and we really have concentrated and prepared for this enhanced revenue that is beginning to flow through the Company. It is at the end of what we consider here the control and cost reduction in preparation for the future which started many, many months ago.

I want to turn our attention to what is the next stage in our Company and that is called revenue enhancement. I want to talk about what I think are the opportunities for some of the larger businesses. I want to start in the aluminum business which has been a very, very strong producer even through difficult times. These new applications and when I'm talking about new applications particularly in that business, not only are we going to continue to cast, we are also going to machine; for example, in the brake cylinder industry, these have been separate operations to companies, one doing the casting, one doing the machining. For example, in this new Bosch (ph) relationship we would do both components, not only casting but machining. The added value really accrues very nicely to the profitability of the Company and reduced costs to our customers.

Also point out in that particular industry it seems that a lot of the underutilized capacity that has been out there for some time is being absorbed. This is good. The more absorption of the capacity the better off that industry is going forward. So we are looking towards some help in a particular area relative to increased volume and profitability.

Over on the capital goods side, again, at AMCO (ph) we're looking at new customers; we're looking at doing more with the customers, more added value. Over to capital goods, we're really concentrating on what we call the new applications; for example, in our Pico (ph) systems, rubber (ph) company. We have a new application in the snow removal part of the industry which is kind of a breakthrough.

Over at PMC (ph), column A, the pipe machinery group, we have largely always had made fixed asset machine equipment for doing the turnbuckles. We have now introduced a new infield type of maintenance repair pipe fitting machine, new market, same customers, new market. Just again applications, applications with our standard systems.

Over in the capital goods, induction particularly, we are concentrating on some new and different forms of induction heating and of course, those applications are particularly interesting to folks in China and Russia.

In the rubber group, our facility is on stream in China, operating. You remember we set a wire harness application over there for our customers, current customers for shipment of the product in China, not to be exported back to the US. That is off and running well and again the applications, the type of customers we should be able to increase dramatically. That unit looks very, very strong for the future.

ILS, we weighted the revenue -- we talked about it for seemingly endless quarters about the truck business and the semiconductor industry. That is up and running and healthy and growing and we are getting a lot of new customers, a lot of new possibilities. The application for our logistics supply chain manage at point of use is outstanding. In fact by our ILS Tech Group, particularly in the semiconductor business key diagnostics, clearly ILS is the investment we made is beginning to show the real upward mobility of that particular application worldwide, including price-select China.

We will be concentrating here at the Company around the revenue, around the revenue in our particular current basis in aluminum and capital goods and rubber and logistics and others and the forging. The new applications won't help us in the forging business because as Matt pointed out, it is completely sold out. Things look bright. We are prepared for this. We will continue to be very disciplined and make sure that our costs do not get cycled up very quickly and we intend to try to pick up the revenue -- excuse me -- the profitability that we lost in the economic downturn on the upturn. So you can count on us to be disciplined, continue to remember our costs and cost controls and concentrate on increasing sales which will increase the bottom line.

With that, I will be glad to turn over the system to any questions.

(OPERATOR INSTRUCTIONS) Lauren Holland (ph) with Lehman Brothers.

Hi, it's actually Sarah Thompson. A couple of quick questions. On the steel, I might have just missed this in your comments but are you able to pass the price -- have you been able to pass the price increases on to customers in the first half?

We have been successful passing through approximately 50 percent of the increase in cost. With the other 50 percent, we are working actively to resource those products. One of the issues with this businesses which is an opportunity but also a risk is, our customers challenged us, especially when they're giving us new opportunities and new business to help them find a lower-cost alternative. So we view it as a challenge, in the short term it is a problem but I think when it is all said and done, if we are able to pass through 60, 65 percent of the total increase in costs and be able to resource the other third, that is what our job is.

That is pretty consistent to what we've heard from other people. So that is good. Can you give me what the actual dollar hit for steel was in the quarter? Do you know that?

I would say slightly over half a million -- it could have been as 600,000.

Okay.

And that would be at ILS, which is of course is really the only one that it would really be impacted in any significant way.

Got it. When you were talking about working capital, you said it was from the capital equipment group; they had record June shipments. Have you seen that cash come in yet?

No.

You have not.

In most cases on the large equipment, we are getting progress payments but the volume was so huge in June itself that there is a lump of at least 5 or $6 million that is right now flowing through there but those are supported in 99 percent of those cases by letters of credit. We are not exposed on those at all.

Okay. And your normal collection terms on that would be 60 days?

It could be slightly higher, Sarah, because in some cases they are major equipment orders where we have to get them to the steel plant whether that be in Korea or in China and we have to run them off and make sure they work. So there could be some small hold back in there that will be held for longer than that, call it 90 days or 100 days.

Perfect. That's all I had. Great quarter.

Robert Stottman with Bentley Capital.

Congratulations on an outstanding job. Can you explain the seasonality of the business in the sense that the guidance for the year would indicate that the second half earnings will be quite a bit lower than the first half. Is that because of seasonality or is there some other factor involved?

No, it is very historical that the third quarter, particularly is the one that is impacted by any involvement we have in the auto and the trucking industry that has been a fact here for 10 years plus. That is the hard one to gauge. We are actually kind of optimistic about it but we've got a good handle on the fourth quarter, historically and we think that will be solid. Third quarter has been subject to shutdowns and that is when the auto industry and the trucking industry takes advantage of if in fact they have any overcapacity -- anything in the field, anything on those lots that they haven't sold. They normally ramp it back. There is a 2-week shutdown but that is really the wild-card relative to our view of the rest of the year.

Okay. That makes sense. The second question is could you explain the nature of the tax rate? It was 13 percent in the second quarter? Where is the shelter coming from and how much longer will this continue for?

This is Richard Elliot. I am a Chief Financial Officer. We have a net operating loss carryforward at the federal level which eliminates all federal corporate income tax. The amount at the end of the year was about 35.7 million of NOL carryforward so when that gets consumed, we will begin paying federal income tax again. At this point the taxes you are seeing are just state and foreign.

Okay, thank you very much.

Kathy Nolan with Salomon Asset Management.

Sequentially it looks like there was about a $2 million increase in SG&A and I am wondering if you could speak to what is causing that and how should we think at that this level of sales? What is the appropriate SG&A quarterly run rate?

There are a couple of things that contributed to that increase. The 2 major ones are we mentioned the acquisition of the 66 percent of the partially owned Japanese subsidiary. So we are now the whole owners of Jamco which is piece of the induction business. Between the elimination of dividends, royalties that we have been receiving from them as a partial owner and the addition of their SG&A was in the vicinity of $750,000. And then we have also incurred some fairly substantial Sarbanes-Oxley compliance costs in the second-quarter. Then there were various other miscellaneous ups and downs in terms of some reserve charges, etc.

As far as the long-term run rate, we were looking at about 18 million and about 9.8 percent, 9.5 percent for the half. Historically that percentage has not been bad. If the volumes stay up as a percentage, that should decline somewhat.

Okay, okay. Then I just wanted to clarify, you indicated total debt did increase in the quarter sequentially. Do you expect that number to come down in the back half of the year and end the year where you started or are you just not sure because of the growth in the business?

It's Matt. It is very difficult to say and I had mentioned we have been surprised again and again by just now significant the uptick in real customer activity is. Although we anticipate we have made the working capital investment specifically to make sure that we are probably at a high water mark and anticipate actually generating some cash in the second half. It would be impossible to go on record with any specific number at this point.

So it is really just dependent on the growth in the business at this point.

Yes, the big driver in there, the ILS inventory number as I pointed out during the call, we were from a days on hand view, we were down a little bit lower than we would have liked to have been at the end of the first quarter. But that investment has been made and I don't think there is any more that has to be made in a second half.

In the inventory days?

Correct.

Can you just comment on a semiconductor business? A lot of semiconductor companies have reached I guess in the back half of June some weakness in their business and I'm just wondering if you can comment on that at all? Did you see the same thing from your customers?

No, we are just beginning to involve ourselves in the semiconductor industry and as our customer base grows and expands, we will conduct to increase the revenue, I believe. So we are not tied to necessarily over the next -- hopefully over the next 4 or 5 years not necessarily to how that particular industry is doing quarter by quarter. We are more involved in growing the business within the segment. We are counting on that to now that we are really well-established proven commodity in that particular industry. It is historical -- like when got into trucking to get into lawnmowers and you get into recreation vehicles. As we move into the marketplace, there is normally a great opportunity to increase the revenue regardless of how that particular segment is performing.

If I can just get a few numbers from you. If you could tell us what you're annual yield buy is in ILS that would be helpful and also if you have a cash flow from operations number for the first 6 months and also a CapEx number?

Those kind of questions would be best to deal with off line. This is Rich Elliott.

Okay, thank you.

We are showing no further questions in queue at this time. I would now like to turn the floor back over to management for any closing remarks.

Thank you very much for being supportive in the last couple of years through some very difficult times. I clearly think these numbers indicate that we are on the right track and as indicated, we are going to concentrate on our costs, have a more important on the revenue side of the business and things look optimistic, not only for the balance of '04 but in the future. Again thank you very much for your support.

Thank you, this does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.