Park Ohio Holdings Corp (PKOH) 2004 Q3 法說會逐字稿

Good morning and welcome to the Park-Ohio 2004 third 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 the 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 2004 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 presents EBITDA because management believes that EBITDA could be useful to the investors as an indication of their ability to incur and service debt and because EBITDA is a measure used under the 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 Oct. 29, 2004.

Now the meeting will be turned over to Mr. Edward Crawford, Chairman and Chief Executive Officer.

Gentlemen, you may begin.

Good morning, ladies and gentlemen. Welcome to our third quarter results call for '04 and we will also be addressing our year-to-date results. At this time I'd like to turn the microphone over to the President and COO of the Company, Matthew Crawford.

Thank you. Good morning, everyone, and thank you for joining us on our call. I want to spend a few minutes talking specifically about the third quarter results and our individual business units.

First of all, I'd like to say we were pleased with the business volumes during the third quarter. We saw a year-over-year increase of 36.8 percent. Of course, that included or was augmented by the Amcast acquisition which we got about a month's worth of revenue from.

But in general we were pleased with those volumes, particularly in light of the fact that the third quarter has historically been a challenging period really for all manufactures in the U.S. because of shutdowns and the end of summer, holidays, etc.

Quarter over quarter, our revenue was flat, once again kind of impressive and even surprising considering that second quarter is typically our strongest quarter from a revenue standpoint.

On the profit side, year-over-year, we were up substantially 232,000 last year in third quarter; this year, 4.9 some million. That really reflects the robust revenue growth, the better absorption across the board, and really a strong effort on each of our business units but specifically the manufacturing private script that we will talk about later.

Quarter over quarter, of course, I mean third quarter versus second quarter of 2004. We want to spend some time on. We saw somewhat of a margin drop in real earnings. We saw income go from 7.7 million down to 4.9 million. Although that appears to be very large, the reality of it is there's a couple specific areas of it that there are things that happened to us during the third quarter that we're going to talk about and we have some specific action plans to change those going forward.

With that, I want to talk about each of the business segments. First ILS on a year-over-year, a 25.4 percent increase. The core market continued to be very strong and plus we have seen some new business activity as I've mention on the past couple of calls we have signed some new orders. Our order book is strong. We are seeing a lot of activity on the outsourcing front and we are real happy about that.

Our core business is truck; agriculture. Everything is really quite strong, semiconductor, etc. We are real pleased with the performance in the past quarter from a revenue standpoint at ILS. Quarter over quarter, we did see a modest slip of about 2 percent revenue but the reality of it is, we look mostly during the third quarter at ship dates.

Ship dates stayed very strong actually increasing year-over-year somewhat substantially, since as I've already mentioned we do see a fair amount of plant shutdowns in the third quarter which can impact that total revenue number.

A specific note I do want to talk about. Some new order activity in the agriculture segment. The small truck segment, I think many of you on the call know, we do a fair amount of Class A truck business but we've seen some increased activity on the small truck end as well as new accounts in other areas of the business. So we are pleased with that.

From a profit standpoint, ILS was up 6.3 percent year-over-year. That is due generally to better absorption of the overhead numbers and, clearly, we continue to the the beneficiary of the restructuring efforts of the past couple of years.

The first area that we need to focus on I think as a 25 percent drop quarter over quarter in profitability in ILS segment. We anticipated some drop in this segment during the third quarter. It was significant and the margin drop to 5.5 percent was a bit lower than anticipated as well. This is due to really a couple of areas -- the most important the most significant is steel prices.

I don't want to say we underestimated that but I will say we have been surprised by the accelerating steel price increases. We have seen as much as a 50 percent increase in product that we purchased that has steel content in it. We've also seen not only steel increase but increase cost of premium freight. As most of you know just getting product these days can be challenging and we are really doing a great job here, I think, in making sure that we have the product.

We are still above a 99 percent rate of making sure our product is at the point of use on time. So we are doing a great job there but it is certainly showing up in our margins.

Having said that, as we mention on past calls we have been very aggressive; trying to pass these costs through and we have seen during the third quarter about a -- we have been able to pass through at a 50 percent of those increased cost in the third quarter. We anticipate and our action plan is very aggressive has been during the third quarter and will continue to be during the fourth quarter and into next year to recapture more and more of that.

50 percent is not acceptable; we recognize that the steel price increase will not subside until at the earliest mid next year and we are addressing and have addressed price increases at our major customers some of which have been confirmed and just not seen yet in our margins.

So I think we have got a great action plan in place. We are being more aggressive than we have been any time prior to this quarter. We recognize this is an issue and I think we have seen the low water mark relative to our action plan to pass through to steel price increases.

Let me move onto the aluminum products group. Year-over-year a 78.3 percent increase in revenue. Amcast, as I pointed out earlier, we enjoyed about a month's worth of Amcast revenue which accounted for just over $10 million worth. So that what that tells us is that not only was the Amcast acquisition strong at the revenue line during the third quarter, but we also enjoyed a nice increase on the core Gamco (ph) business.

The increase in revenue quarter-over-quarter was 26.4. Once again enjoying a nice increase from the Amcast acquisition. We did see some small slippage in the original Gamco business quarter-over-quarter; but once again the weekly sales numbers were strong. That was mostly because of the plant shutdowns and vacations in the third quarter that we didn't see in the second quarter.

Once again solid business growth.

We're going to talk a little bit later I think about the change in the competitive landscape in the aluminum casting business and we are the beneficiary of that. We have seen new business not just at Bosch which we talked about in the past but this (indiscernible) as well as others. So we are pleased with that.

From a profit perspective, year-over-year a 17.6 percent increase but I want to focus more specifically on the quarter over quarter drop from a margin of 9.7 to 6.3. Most of us expected that due to the product mix. The Amcast acquisition was the acquisition of a troubled company, a company that was only really not profitable when we acquired it and only modestly profitable at this point. So that product mix has impacted our overall margins.

We also had the acquisition costs associated with that transaction, which impacted the third quarter results; but as to the operation, the areas in which we struggled to overcome during the third quarter the impact on our margins was increase in natural gas cost which was modest but important.

And I think that we also saw an unusual event this year during the third quarter in the shutdown period and we all call partial shutdowns, i.e., they didn't really say they didn't want any product. They just wanted a little product. And to the extent that that happens, you have to keep the plants up and running. We can't shutdown, we did not shutdown during the third quarter, any of our plants, so what we ended up having was some difficult weeks particularly in August where we are shipping product but not really fully absorbed to enjoy the normal margin of the shipments.

Last but not least, I do want to mention that the quoting activity is very robust in that business unit. I know that Ed's (ph) going to talk a little bit about the competitive landscape there and all I can tell you is we are the beneficiary of the Amcast acquisition in our presence in the marketplace right now.

Relative to manufacture product revenues up 41.8 percent year-over-year. On all segments or all parts of that business, we are very strong. Locomotive builds continue to be up, aerospace is strong, on the capital equipment side we've talked a lot about the shipments into Asia and Russia. We continue to see very strong order activity in the steel industry; in fact, we are beginning to see a rebound in the order activity on the U.S. front as well.

Really the North American front so we are pleased with that.

In fact we've continued to see that and are quoting some very large jobs; and we are not only excited about that that business currently in third quarter but have a strong backbone going into next year.

Quarter over quarter we were down a little bit in revenue 8.3 percent. I think that's a little bit of a misnomer. We have a capital equipment group, really doesn't see revenue until they have shipped that product generally. And we get some timing shifts relative to large shipment of capital goods. I wouldn't take anything from that.

Income year-over-year is really an eight times multiple from the profit line that just reflects the strengths principally in the capital equipment group and in the forging group. As many of you know we have a lot of proprietary products in both segments and we are enjoying good volumes and good margins there right now.

I want to talk a little bit about the bank line. We were up from about 112 million at the end of the second quarter to 130 million at the end of the third quarter. Most of that can be accounted for on the acquisition of Amcast. We spent about $10 million on that acquisition plus some closing costs and legal costs etc. There still is a delta there of about $8 million which was invested largely in the working capital expansion to support the robust sales we are seeing.

Days on hand which is really the number that we watch for inventory across the business are quite frankly coming down a little bit. We have seen a days on hand increase that is responsible for the bulk of that $8 million in the receivables segment; and we understand where those dollars are invested and anticipate that coming down nicely prior to year-end.

In conclusion, I just want to mention that once again, although in general, the third quarter volumes are strong or in great demand on all fronts, order activity is exemplary. One of the reasons we're all invested in this company is because we have a great portfolio of assets. This is a great example of where some businesses struggled because of specific issues, others stepped in and picked them up. So we are pleased in general with the third quarter results. Minus a couple of issues I've mentioned most specifically the steel increases and I can assure you our action plan is well along its path to retrieve those margin dollars during the fourth quarter and well into next year.

So thank you for your support. I'll turn it back over to Ed Crawford.

Well, we're off to a great start for the nine months. The fourth quarter looks positive and '05, we're pretty optimistic that we have positioned ourselves again for the last two or three years to take advantage of any continued increase revenues.

Address what I call the trailing cost of the trading pass on. We're committed here to continue to keep a tight lid on our costs. And no matter how fast we paddle, particularly with steel increases, they keep coming at us quarter by quarter, month by month.

By the time we get the new prices and try to pass them on, there is a lifetime. We moved initially I think generally cross (indiscernible) moved to the idea of surcharges but at this particular point it's beyond surcharges. Some of these raw material prices are really never going to go back to basic and so we are talking more in terms of real permanent increases in prices as I don't see any slowdown in the ramp up of steel prices over the next year. So it's a matter of fact, it's control.

But, clearly, you can't pass on an increased steel portion to a customer before you get it; and when you get it, you get it that day and you can't give it to the customer the following day because they have their products sold over a period of time. So there's a compromise that this will continue to erode some of our margins. But again with increased volume and so forth, we will continue to improve in the final result.

Again back to our mentality (ph) of controls we are looking and keeping very very close touch on our balance sheet making sure that our receivables are turning, making sure inventories continued to go down as a percentage of sales. We are committed to being very efficient and continue to being efficient on the upswing as we were as the economy moved down over the last couple of years.

CapEx is something that we continue to control and our very disciplined about but they're great opportunities and when we see them we are going to try to take advantage of that situation.

A quick note on the aluminum business. This acquisition of Amcast, combining with General Aluminum, makes us one of the number one companies in North America if not the world, because through this acquisition we're able to pick up seven new customers of substance; more important enter a complete different product line safety critical areas, knuckles and brake cylinders and calipers.

This is one side of the market General Aluminum was not in previously. We're in it now in a very big way at a very low entry level from the standpoint of investment. We announced that we paid $10 million in cash for this company and assumed some additional liabilities.

Let me give you have a brief quick look at the balance sheet as we looked at it. Between the receivables and inventory and in M&A that exceeded some $50 (ph) million. The accrued liability including the payables that we assumed were less than 9. So our cash investment was 10; our accrued liabilities, our assumed liabilities were 9; but we receive substantial assets and this is going to have a material effect on the Company and on the industry in this particular segment in the future. Fortunately or unfortunately for some, two of our major competitors in this particular space have both declared bankruptcy in the last couple of months.

This is reflective of their higher cost compared to ours. Clearly when we -- and always had a very profitable aluminum company, we had an opportunity to look inside Amcast and saw exactly where they were failing to be profitable. And we've had some expense looking at other companies so we think we know how to run a successful aluminum components company.

We like the position, we like this particular part of the auto industry and trucking industry, and we think we'll be very successful and I think you'll start to see the permanent results of that acquisition in '05 on the aluminum side.

ILS, I think, is doing a good job, again, dealing with the increased revenues but again passing on cost that lagged between when your price get increase and when you can pass them on but that seems to be very solid going forward. Our rubber unit top is moving, as we anticipated. At the last conference I talked about it, it's a little behind our overall view of where it should be at this time of year but it's really turned out to be at this juncture of '05 an event where we will materially come home to our expectations for the future.

Its unit in China is up and running, supplying their customers there so we continue to believe that our investment in the rubber components part of our Company is a good strategy.

Forging continues to go strongly, particularly our unit up at Crop (ph) in Chicago where we are involved in forging for military as well as commercial.

The last unit I want to comment on is our capital goods group. This is the superstar of this year and going into next year. The number of opportunities we have, worldwide, on very very large opportunities which are currently close to or in the near future will be signed hopefully for the year end will turn out to be a very important part of '05.

Generally speaking, I think we're on track; we're trying to take advantage of the economy. The increase. It's difficult out here to be in manufacturing but if you're good at it and we think we're good at it, we are going to continue to improve and take advantage of these opportunities in '05.

At this juncture I will be more than happy to open up the lines for questions.

(OPERATOR INSTRUCTIONS). Sarah Thompson, Lehman Brothers.

Just wanted to get a little bit more help on the steel side. Can you give us the dollar value of what hit you in the quarter?

We -- as Matt said we continue to feel some effect from the steel prices, again, primarily, at ILS though bits and pieces elsewhere in the Company. Year-to-date, we have succeeded in passing through part of it; and offset some of the rest of it through resourcing but the net hit to profitability for the year-to-date is about 1.5 million. For the quarter, probably half of that.

Sarah, this is Matt. One of the -- that's the direct cost. One of the other things that's difficult to measure right now are things like as I mentioned in my talk -- premium freight. Just getting the availability of this product which we have done a great job of, that's what we do but I don't think you can capture the full amount of the steel problem in just the absolute cost or increase in cost of the product.

I can appreciate that, but this is in terms of what you can quantify, this is a net million and a half year-to-date.

Yes we tried to track by significant vendor of components that have steel in them. We've tried to track this amount; it's obviously very challenging particularly as you get down to vendors that do less steel that are harder to track where perhaps only a small component of their costs are steel.

Right and if you look at your buy right now, what would you say your kind of total steel buy is, obviously including components? You have a sense of that?

I would like to get back to that. One of the things we got the components over at the crankshaft in the forging group which is all steel component. Although it is not a lot of steel in dollars it's significant enough that I think we'll get back to you with the information relative to that particular question. Steel as a dollar purchase by the overall Company.

It's tough to answer steel by itself, because we don't buy much steel by itself. We buy steel as an element of material costs and a variety of components.

Right. Got it, that's fine. And then on Amcast you said it was 10 million of revenues for the quarter. I'm assuming -- well I shouldn't say it that way. Does it includes any EBITDA? You get any EBITDA with those revenues?

Very modest.

It was profitable for the month we owned it but modestly.

And I don't think you gave this out before. I think when you bought it, it was running, I was under the impressive that it was either negative EBITDA or no EBITDA? Is that fair?

That's correct.

So as you look out do you think you can get the Amcast revenue sort of up to your average margin for that sector or is there anything specific to that company we should look at differently?

Sarah, we are learning about the business everyday; clearly, they have an overcapacity issue so the product mix they have today and the margin and the gross margin they have on some of their significant products is below what we would be willing to accept. So it'd be very challenging on the current book of business to get to what we've grown accustomed to from our margin. But I do think we have substantial opportunity to not only restructure the business but also -- which I think will help -- but also to add new sales at better margin so the margin opportunity there is significant; but on both ends from revenue standpoint and a restructuring standpoint. But we're trailing along some pretty low gross margin products from the acquisition.

Sera we are in what we call shakedown crews. There's a lot to be done in this Company in the next four to five months and there'll be some business we will continue to go forward with, some business we will not. Some business in there that we are not willing to accept the margins but there is some disengagement, some add-ons. So generally speaking, we believe it will hopefully mirror image of General Aluminum, historically.

I think there's a lot of opportunities but it is not going to happen overnight.

That's fair. I appreciate that. And then last thing, you touched on this and I'm sorry I didn't totally follow it. I can't tell from your working capital balances on your balance sheet, what the use was, I think because it includes the Amcast numbers but I think you said about 8 million. Is that correct? In the quarter?

Elliott: The non Amcast debt increase was called 7 million and, obviously, there's a number of calculations that go into figuring out where that money went. But in general I was trying to articulate that inventory is although up, it is well in hand from a days on hand (ph) standpoint. It is just supporting increased volumes. But from a receivable standpoint, it is up from a days on hand standpoint that is responsible for most of that $7 million increase in bank debt and we understand where those investments are. And we are -- they're not problems. There are just things that we have to get in line during the fourth quarter and we will.

Richard Rossi, Morgan Joseph.

Just a couple of things. You mentioned the acquisition cost related to Amcast in the quarter. Care to quantify that in any way? Are we talking a few hundred thousand dollars or is it less substantial than that?

It's on that or perhaps slightly more Richard. In the aggregate it's not notable; I only raised it in the context of trying to reconcile for the full increase in bank debt.

The second thing is, in terms of you trying to -- China demand in your Chinese business, the Chinese are trying to slow their economy up. How much exposure do you have there? I certainly don't think that you would be seeing any slowdown right now and not anticipating it any time soon. But if the Chinese economy materially slows in '05, is there an exposure there that you think could come up and bite you?

Very interesting question. The answer is no. And it's no for two reasons. We have exposure in China on two fronts. One is principally from the capital equipment group. Their infrastructure investments are not slowing down. So from that perspective, our induction heating equipment, our type threading business are -- continue to see strong order activity.

As it relates to our business the second part of our exposure in China which is our small business located in Shanghai which is our -- what we call Park-Ohio Mall where we do rubber for automotive, we do some fashions for automotive, etc. The opportunity there, Rich, is so great and we're so small that we continue to see opportunity. If they -- if the China -- if the government chooses to slow the economy by a point or two that really doesn't impact our opportunities to sell principally to either U.S. multinationals or in a smaller and smaller way to some of the Shanghai-based companies.

Let's again address the China initiative Matt summarized again. Our view is we have the Park-Ohio Mall over there. We have our building. We've rented it. We have our offices. We are using that to develop our opportunities in China for China. We followed our, initially, our major Japanese rubber customers to there on their request. The whole investment in China is $1 million. So it will continue to be a small incubator approach; although quite frankly it is doing very well and we want to be there. We want to be manufacturers; we want to own our own facility which we do. It is very modest and if the whole economy went in half it would (ph) affect us.

Just for clarity. You mentioned that steel cost year-to-date were 1.5 million in third quarter -- half of that in the third quarter. Are those net after-tax numbers or are those on the operating line?

Those are operating.

And then just one final thing or you didn't mention guidance. Are you standing by your $1.80, $2 guidance?

Yes.

Carew Martinsen CIBC World Market.

Actually it's Philip (indiscernible) CIBC. With regard to the steel prices the amounts you gave us. Are those net or gross amounts and can you talk a little bit about pricing going forward? You mentioned that surcharges are no longer or I guess being phased out for more standard price increases. Can you give us a sense of what your strategy is there? How much you think you'll be able to pass on?

Well, first, the answer is net. And secondly -- let's -- I know it's difficult -- Sarah asked a question trying to get us to quantify this matter. We, in very few cases, buy steel directly. And to the extent that we do and the most significant case I can take up is the direct pass-through on cost. So although we do buy some, in general, the impact to our business is through our vendor base particularly at ILS.

We have mechanisms from which to get back to the lead negotiating table would our customers at the ILS business to talk to them about the increases. People are well aware of these. This has been clearly an evolution during 2004 for people who thought it was a small problem to realizing it was bigger than they thought to realizing it is an industry which is fundamentally changed and has to be addressed.

So we are working with our vendors to not only obtain product but also work with them to get them the price increases that are necessary; and we are very aggressively pursuing our customers and are at the table with all of our major customers to talk about a fact that they are aware of. No one is hiding from this fact anymore. So our strategy is to use our significant vendor relationships with these major OEMs to get in front of them and talk about it.

And we have had success to date. I'll be the first to admit we didn't push it as hard as we should have probably in the second beginning of the third quarter. We didn't realize that this steel scenario would be as permanent and the increases would continue to be as great.

So we have always had success in passing along these types of increases. It's just a question of how aggressive we have chosen to be. So I think you'll continue to see traction over our thousands of customers in this area.

Let's look at the positive side of this dialogue. We have not had any interruption in availability. So when it still gets tight, the pricing comes along, you take the pricing, you negotiate hard, you pass it on as quickly as possible. But what has become a factor now is availability, particularly coming out of Taiwan and Asia where they have an opportunity now to use their steel with the availability they have.

We have been fortunate to have had and build up great relationships so this has not been an availability issue and, ultimately, that is a very important part of the future that we continue to supply all of our major customers in some in a dramatic ramp up like the trucking industry and still met our expectations. Their expectations are 100 percent supply on time.

So it is nice to talk about increased prices coming at you and inability to pass them on but we are in the business long-term of quality products and getting it to the customer when they want it. So you just have to the live with it. This is a period we will go through; steel prices will go up and steel prices will come down and, hopefully, we will benefit on the way down as we lose gravity on the way up.

I think in the past, Richard, you and I talked about 60 percent of the increases you were able to pass on and about 40 percent was affecting you. Do you think you're going to try to push that relationship to pass on a greater percentage of that?

Well, we keep trying. But by the time we try to push that out it will be up again. Steel prices are going to go up, develop higher. They're going to go higher -- they're not going down in the next 18 months.

Switching gears. In terms of what's the next step for the Company. You obviously made the Amcast acquisition and some of the competitors there are in bankruptcy. Are there other interesting assets to acquire? Is that where your focus is in terms of acquiring assets or are we in a consolidation integration phase to get Amcast up and running further?

Well our view on acquisition. Quite frankly, I didn't anticipate making and acquisition in '04. It wasn't in the plans what we call a bolt-on by a company that we know an awful lot about in one of our spaces that we lead in at least from the standpoint of profitability is to go back and look at the aluminum components group as companies in the last four or five years, General Aluminum has been the most profitable. And this is a bolt-on. An acquisition we understand. It was at the right pricing and we're going to consolidate it. So it was in the plan; it's in the plan now; it's an important part of '05.

As far as the future? We will let that dictate itself.

This is Mat. Let me go back and comment in the context of Sarah's question as well so we're clear on this. The biggest opportunity that is in front of us right now is fill in the capacity and being very competitive with the assets we have currently. Having said that, the Amcast business, we see tremendous opportunity in. But I want to make -- we did not see the evidence of that restructuring in the work that we plan to do during the three quarter and during the third quarter. The Amcast business from our historical classification was struggling. But, clearly, when we bought it was a great break even-ish type business but it has had a successful passed their so we believe that the current book of business with some restructuring and with some help can be even more profitable. And that's I think where we're focused right now.

Sounds like you're off to a good start with the EBITDA (indiscernible).

Well I will assure you when we report in the first quarter next year I think you'll see some great results in that side of the business.

I'd like to turn the floor back over to management for any closing comments.

Thank you for the continuing support. We will keep working here diligently to improve the Company. I think we're going to have a successful fourth quarter and '05 at this particular juncture. If we keep to our knitting and stay in control of our costs and run the business tightly which we intend to do, we will have a very successful follow-up in '05. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.