Park Ohio Holdings Corp (PKOH) 2005 Q1 法說會逐字稿

Welcome to the Park-Ohio first quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] Before the conference call begins please 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 revenue factors may be found in the earnings press release as well as in the Company's 2004 10(K) filed with the SEC on March 16, 2005. The Company undertakes no obligation to update any forward-looking statements whether 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 principals and is considered a nonGAAP 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 the credit facility could determine whether they may incur additional debt under such facility. For a refacilitation 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 2, 2005. Now the meeting will be turned over to Mr. Edward F. Crawford Chairman and Chief Executive Officer. Gentlemen, you may begin.

Good morning, ladies and gentlemen. We are here to review the first quarter results of 2005. I introduce the President and the Chief Operating Officer, Matthew B. Crawford. Thank you very much. We will start by talking about the results on a consolidated basis. We are pleased to report 19% revenue growth year over year. Most of our end markets are very strong. We saw double-digit growth rate rate in two out of our three business segments with a third IOS Growing at over 9%. We did see some softening at the very end of the first quarter late in March from the auto segment but in general it had very little impact on the first quarter. The outlook going forward looks very robust. We are very excited about the balance of the year.

At the EBIT line, EBIT increased 7.2% year over year but more importantly -- I think, operator, you need to make sure that all the people on the line are on mute, please. Secondly, I'm sorry, I was just starting to talk about the EBIT for the year, year over year we are up 7.2% but more importantly the EBIT margin expanded from 5.2% in the fourth quarter to 5.9% in the first quarter. EBITDA also increased year over year by 8.7% to a $17.984 million number. This resulted in EPS being slightly ahead of where we expected it at $0.54 versus $0.52 for the first quarter of last year. Based on what we saw in the first quarter and our confidence on the strength that we are still seeing in our key customers and most of our end markets s mitigated somewhat by a cautious outlook with respect to the economy in general but also the auto segment we are lifting the upper end of our range for 2005 from $2.15 to $2.30.

Now I am going to talk for a few moments about each of the individual segments. ILS, first. ILS continues to be very strong showing 9.1% growth year over year. Certainly the truck market five through eight have been strong, the builds continue to be very strong, the outlook is strong. Also we are seeing substantial upticks in many other markets, lawn and garden, industrial equipment, appliance, we are seeing upticks in plumbing, a fair amount of new government work as well as a significant amount of new customer activity. So that business is, the increases there are very broad-based and we are very excited about the prospects there.

From an EBIT perspective ILS fell from 9.2 million in EBIT last year in the first quarter to 8.2 million in this quarter just done in March, reflecting a margin decline from 7.9% to 6.5%. More importantly I think that this is a significant rebound from a 5% EBIT margin in the fourth quarter of '04. So as most of you recall we were beat up substantially from increases in costs going on through '04 and our efforts as we indicated on the last conference call to achieve the price increases combined with our ongoing efforts to keep our cost contained. Really were key in seeing a 1.5% increase quarter over quarter. So although it's a drop year over year I think it's significant that our margins in ILS are rebounding nicely as we expected.

Moving on to the aluminum segment. 56% increase in revenue year over year; impacted significantly obviously by the Amcast acquisition. Revenue I think was impacted as I pointed out modestly at the end of the first quarter from some cut backs in build rates or orders at GM and Ford but quite frankly all our other customers held up extremely nicely. The revenue outlook is a little bit murky certainly principally due to some market issues we are seeing at Ford and GM but we do not expect to see a drop in revenue off our expectations of greater than a 5% number in the second quarter based on the current -- the current releases that we are seeing from our customers.

Touching briefly on the impact of GM and Ford, obviously we are seeing some bigger, some larger drop offs at GM and Ford individually but I want to remind everyone that they represent, although significant volume at GAMCO there is a number of customers we have both tiers and other OEMs that represent the lions share of this company as well as 10 to 15% being nonauto. Also I want to point out that quoting activity is very active so the surge in year over year increase in revenue is very broad based and once again we are very optimistic about the growth opportunities at GAMCO.

Secondly I want to talk about the profitability. The EBIT margin fell from 5.8 to 5.6 during the first quarter. 5.6 is about the same as we saw it in the fourth quarter of '04. We think it will likely stay and hover in that range until we get the Amcast completely finished and consolidated toward the end of summer. Any volume changes that we see as pointed out that we might see, call it that 5% number that the forecasts are dictating we might see as a fall off in revenue in the second quarter. Will have little or no impact on our earnings.

Moving on to manufactured products. Revenue again strongly at 21.8%, continues to be driven by very strong revenue in the steel and oil patch industries, principally in Asia and Russia but we are also seeing a pick up here in the U.S. The forging business continues to be strong led by a rebound in locomotive and aerospace market as well. From an earnings side EBIT was up strongly from 3.3 million to 5.8 million, driven mostly by the sale of high margin goods in the capital equipment segment and also service orders. Also we are getting the extra volume at forging plants are getting us much better -- I guess at the end of the day we are getting a lot better profitability.

On a working capital basis, our working capital increased by $28 million driven specifically by a $22 million advancement in accounts receivable. This is typical, quite frankly, due to the normally strong March we see in ILS in particular. So that was a jump slightly ahead of our expectations but the February, March period were much stronger than the end of the fourth quarter of last year. Once again which is normal so we saw a significant advancement in the AR column. I also think we saw from a working capital perspective another thing which is typical for this time of year which is a slight build up in inventory due to the strong expectations for revenue in the second quarter.

I also wanted to point out that this is typically, it looks like a significant jump but the end of the first quarter typically can be our high point for the year in terms of working capital usage. That ties very closely with our use on our bank lines. Our bank borrowings increased by $18.7 million through the first quarter. But that does leave us over $50 million left on that line at the moment. Finally our CapEx for the first quarter was $3.6 million in line with our expectations. With that I will turn it over to the Chairman and CEO, Mr. Edward Crawford. Thank you. Thanks, Matt. We are particularly pleased with the momentum that's been developed out of the fourth quarter into the first quarter. There is no reason at this juncture for us to anticipate anything other than a continuing increase in our progress both in sales and EBITDA, particularly through the next quarter which we have a lot of visibility on. Talking about the individual units because when you look at the quarter over quarter we are hitting on all cylinders with again as Matt mentioned a 6.7% increase in sales fourth quarter to first and up 22% in EBITDA and the margins are up.

Let's talk individually about the units a little bit. First ILS, outstanding start, the sales in there are up considerably year over year 126 to 109, like 15%, but EBITDA is up some 49%. That's really kind of an extension we've talked in the past getting prepared for higher volume velocity through the warehouses, that is really taking hold at this juncture. We hope that volume continues to pass the efficiencies and the cost reductions and the closing of warehouses we did a few years ago are finally paying serious dividends. Another exciting part of ILS is that we are going this week to a summit in Shanghai in which we are sponsoring a major presentation to an established customer base. We are taking two of our outstanding customers with us and we are presenting on supply chain manager, Arconts (ph) concept logistics.

We are just beginning to roll-out our system in China. We've been working on it through our operation over there which is going very well but we consider the opportunities for the Company to continue to grow there particularly in logistics supply chain management. So we are going to take our proven systems, product neutral point of view system on the road as such. So we are optimistic about ILS going forward and the growth.

The aluminum business we are very close to finishing on schedule, ahead of schedule the consideration of the three Amcast plants and two scheduled to be completed on July 1. It will be about a month ahead of time. So we really believe that the benefits of that acquisition will really start to hit the bottom line late, the latter part of this year towards our auto story as such. Keep in mind that we have positioned ourselves, our sales to the big three are not going up year over year as projected but what's more important here as-planned we are continuing to diversify the customer base through the Amcast acquisition our new customers are people like Toyota, Honda, Nissan, others you've heard about. This is a company that is doing very well in diversifying itself and when and if there is a slow down in the auto industry per se, let's say for the big three, we are preparing for that by having a bigger platform with more customers and we think, quite frankly, we can continue to grow even in the declining market because we work very hard at being the low cost producer of these aluminum products.

Manufacturing has been great, particularly I think Matt mentioned is our Fords up in Chicago and the aerospace business which is growing, capital goods, PMC, so across the board we are trying to and have -- are taking advantage of our mentality of cost and low cost producer and keeping our costs down and our operating units as the vine goes if it continues to go we will be a major benefactor of that so that's what caused us to change the guidance and these are numbers that we already have a tendency to be as conservative as we are comfortable with but clearly based on the information we have available to us and the visibility through the, clearly through the second quarter we feel that we're off to a year that's something we will all be pleased with. At this juncture I will be glad to open the air to questions.

[OPERATOR INSTRUCTIONS] Your first question is coming from Sarah Thompson of Lehman Brothers.

Hi, good morning. I just wanted to go back on the auto side a little bit. Matt, I'm not sure I totally understood everything you were saying. Looks like it got a little choked up in there. So can you just help us understand what your percent of revenues is for Ford and GM and then expand a little bit about --? I'm assuming the reason you think volume declines at Ford and GM aren't going to have a significant impact on you guys is because you are going to be able to offset those with cost savings from Amcast? Can you just help us again on that?

Let me first point out what my point was and then I think dad can jump in with some more global numbers. Obviously, the only business unit we have that the majority is -- or significantly as opposed to auto in general is GAMCO. To the extent that we do business at GAMCO business is holding up very nicely for us at most customers with the exception of GM and Ford. And to a lesser extent the tiers that we do business with who end up shipping product to GM and Ford. Based on what we are seeing today at GAMCO we do not expect anything greater than a 5% drop in requirements or volume to Ford or GM.

So my point was that in the second quarter which really we get the releases from GM and Ford or from all our auto customers on about a rolling twelve-week basis we have outlook maybe deeper into the fourth month, we do not expect GAMCO to be impacted by greater than that 5% number. Now having said that we don't believe there will -- we believe there will be little or no impact to the bottom line. We are seeing in general that business continue to be strong particularly outside of the Ford and GM pieces most notably in the nonauto segment which is 15% of that business. I think dad has some color on some more global numbers but the point I was trying to make is we do not see significant exposure in the near term because of the issues we are seeing at GM and Ford. Does that answer the question, Sarah?

I guess, and I appreciate that clarification but, okay, so there's something then offsetting it if you think that there's, call it a 5% drop in volumes because of GM and Ford, what's the offset as to why there is not an impact on the bottom line?

Well, in 2004 this country and the big three to begin with, the sales of those in our aluminum business, in our total sales, was 21%, okay? The total business for GM, Ford, and Chrysler relative to the total sales of the Company were 21%. This year the number will be similar based on what we see as a projection. Okay? We don't see really much shrinkage there at all. The offset if there is a question about decrease in volume now from the big three the net volume is going to be picked up, okay, across the new platforms to people like Toyota, Honda, Nissan. And the fact that our consolidation has reduced the operating cost historically at Amcast when we've gone from three plants and consolidated 80% of that volume into the other two remaining plants, 20% of the volume we let go based on pricing. So this is a -- we are I think positioned ourselves in an industry which is rather tattered as we all understand from the number of companies in -- being chaptered. We have never had a higher level of quoting than we've had in the last three months at general aluminum.

So the combination of our expanding our product lines, the safety critical, having a bigger platform, diecasting, sand casting, every aspect, every discipline of manufacturing, a combination of broadening the customer base which in essence not only tier ones but direct, the number of people we are doing business with today is literally four times what we are doing business with when we are playing general aluminum. So that in our opinion is the, our ability to maintain level volume and able to maintain our margins if not increase them. So we don't see any short term effect to slow down by the big three or the auto industry at all. We are going to be taking a bigger portion of a smaller margin if in fact there's a smaller market. Again our goal is to be low cost producer of a quality product and I think based on the information we have available we are in that position. The point we are trying to make is, 5% we don't view as a number that we can't manage. And the point about it is in the context of an expanding business and one in which we are taking costs out during the merger of Amcast and GAMCO we don't expect it to have a significant impact on our profits for the quarter.

I appreciate that: I was just trying to get a stand on it a little bit. Just to double check I got the number right. So GAMCO is roughly 20% of the Company and then Ford and GM are roughly 21% of GAMCO.

No, the big three, I'll be even more specific, Chrysler, Ford, and General Motors represent approximately 20, 21% of the total business of Park-Ohio. That is direct to the customers and also to tier suppliers.

Okay.

Tier ones.

Got you.

That number is not going to grow. The percentage of those particular companies is not going to grow in my opinion in the future. The aluminum business is going to grow because we are going to grow with the other auto companies.

Okay. Got it. Two other quick questions then I will let somebody else go. On your ILS margins obviously it's a nice recovery from the fourth quarter. Given where your pricing is to customers and given where steel costs are now is this about where margins are going to be or do you see those improving from here?

Well, we are not going to comment on that specifically other than to say that we have always said that we believe the margins in ILS should be substantially higher than where they are currently. The progress we can make toward that and how to do it from the cost side or the revenue side we are not able to talk specifically about that timing.

Last question, your corporate expense was up, I guess, 3 million, about double what it was last year, about 50% higher than the fourth quarter. Is there anything specific going on?

Well, a big chunk of that, this is Rich Elliot, the CFO, hi, Sarah, how are you? A big chunk of that is Sarbanes because Sarbanes costs have not begun really to be incurred in the first quarter of last year. In addition to that there's various other individual hits, some bonus accruals, things of that nature.

Thank you.

The next question is coming from Richard Rossi of Morgan Joseph.

Good morning, everybody. I don't want to beat this to death but I just want to also be clear on this auto issue, 21% of the Company's revenues, not the aluminum groups revenues.

Yes.

Okay. And you expect a 5% decline in that total business?

No, we do not. Okay? Matt was referring to the potential of a 5% decline in the big three.

I'm sorry, in the big three. In other words, you are looking at a 5% decline in 21% of your revenues.

No, no, no. Richard, my comment was very specific. General aluminum, okay, is, which is the only division which is significantly devoted to big three sales, that specific business unit could see as much as a 5% reduction in volume in the second quarter based on changes in forecast by GM and Ford.

Okay. All right.

And then dad I think was talking, and then after those comments dad was talking at large about, I think he just was commenting in general about the Company and auto content across the board.

Got you. I'm sorry. My error. Is there much of a difference in how important those lines are to Amcast versus your original aluminum business?

There is a dramatic difference, number one, the, the Amcast business was a more diversified customers in broad numbers, general aluminum had basically five or six accounts that were very auto related, actually was really Ford Motor, Chrysler and some smaller accounts. The new general aluminum which is Amcast has brought us up considerably, our largest probably in growth in indebtedness as the relationship we have with John Deere at this particular point. So we are moving very quickly by design to have a lot more customers, okay? And General Aluminum in essence, we've been asked this question before Amcast, Ford and Chrysler would have represented 90% of General Aluminum sales. And we did not like that. We were uncomfortable with it. We were able to acquire a company that did not do $1 in sales virtually, some small amount, to those companies.

We are continuing by design to broaden the -- although the auto content is going to go up we are just betting on the fact that they are going to sell cars in America and they are going to sell them to either Chrysler, or going to buy them from Chrysler, Ford or GM or buy them from Nissan or Toyota. The strategy here is again to broaden our base with the auto industry and get on the Camry car for example, and the Avalon for example and we are quoting on huge platforms in those particular companies and if we are fortunate which I think we will be, we are going to see a surge of growth in the tier ones and direct with those particular companies. That's the initiative. And you are going to see that 21% of the total in those three company's decline not by accident, by design.

Right.

We do not want to be -- if GM or one of those companies, we lose an account for pricing which could happen, then we can fill that volume up with our other new customers. So this is, we are as concerned as anyone about concentration in the aluminum component business. But it's a great business. You can look at the margins. It's all about velocity and I think that we have a very bright future in the aluminum business and quite frankly given the opportunity with the holdings we have available we would commit some CapEx to that area because of what is available to us in the way of long-term six and seven-year commitments on certain parts with new customers and ROIs that achieve our goal. And believe me in this auto industry we do not -- look at the margins. We do not give away things in the aluminum business.

Okay. You mentioned also that Sarbanes came into play in the first quarter of this year on corporate. As I recall -- am I correct in recalling that it was virtually nothing in the first quarter of last year, then it got close to 1 million in the second and in my notes I've got around 3 million in the second half of last year, is that roughly the progression?

You are correct that there was virtually nothing in the first quarter. I don't have the exact numbers in front of me but I think the million is a little high in the second quarter but then the vast bulk of it was in the third and fourth, yes.

And your expectations for overall Sarbanes costs this year?

I think we've stated previously that as compared to a total of about 3 million last year we are anticipating about half of that this year.

Okay. All right. So you are staying with that roughly, okay. All right. Also I apologize but I missed the manufacturing margins. Could you just repeat that, please?

Sure. We had, you mean for the manufactured product segment?

Right, right.

We were up 3.3 million -- excuse me, you want the margin?

The margin.

The margins were up from, that's good because I didn't say them Richard, they were up from 6.8% last year to 9.8% this year.

Finally, maybe I -- I possibly should know this but ILS in China, my recollection is you are not doing very much in terms of dollar amounts. In general terms, are we looking at this marketplace over the next few years that could develop into tens of millions of dollars of market? It's always hard to -- China is too big to judge.

One thing I want to point out is I think we can talk specifically about ILS but we are already doing tens of millions.

Yes, I'm sorry, yes, I meant ILS, yes.

The, again our view in China has been, roll this out at the Park-Ohio mall, we are -- we own our own company there; a joint venture and the strategy was to again by operating and providing rubber products which we are currently doing for our customer that already existed in China. This was not an initiative and it's still not an initiative to make products to ship back to America. We are there to support our manufacturing customers on the rubber side. We are subsequently going there to support our customers. For example, one of our key accounts is Invacare which is a major account of ours here, Mr. Mixon will be joining us there and is opening currently I think three plants there which we are there to support him from a logistics supply chain management as we are currently doing for him in his plants. Further we are being joined by one of the purchasing directors of Volvo which is another major account of ours. So the opportunity in China is enormous. We could qualify it relative to prospects. But we are there and our whole conference is there. China is in the supply chain management mentality of the 1970s. Our customers are what we call world class companies and they are in the 2005 model which is ILS and Volvo and supplies materials and all the sophisticated company, GE, are on our model and that's why this continues to grow.

Our goal there is to in essence, why are we going to China, we are going to China to take them from 1970s to the year 2005 without going through the steps necessary to evolve to supply chain management level. So we're pretty excited. It's going to be very well attended. We have been featured in two national magazines in China on logistics. One of the outstanding professors in logistics in the country will also be part of this one day meeting. This is an eight hour presentation. So it is a commitment but we look at that market as incredible opportunities for our particular skills because they are very, very, very far behind in supply chain management logistics as we understand it. We don't want to put a number on it but we think it's a great opportunity and it's an opportunity to take our software there and make it -- make the transition that they are going through faster and more efficient.

One final thing at least according to my P&L the tax rate was up year over year by a couple hundred basis points should I be raising my full year tax rate versus last year a couple hundred basis points or is it just a mix issue there?

This is Rich Elliot again, the rate in Q1 2005 is probably reasonably indicative of what the full year 2005 is going to be.

So that would be down versus '04 then.

Right, in '04 there were some -- there were some things that -- Mexican tax chain law changed that had to be accommodated with some tax provision at the end of the year so it ended up with a higher implied tax rate than is going to be relevant this year.

Okay. Very good. Thanks very much.

Thank you.

Next question is coming from Tom Klamka of CSFB. Your line is live.

Good morning. On the manufacturing side you had some nice growth there over the last few quarters. Can you talk a little bit about where you see that growth coming from? And then also sequentially from the fourth quarter I think your revenues were about flat but your margins were up nicely. What's driving that?

Well, this is Matt speaking. That business is invested heavily in capital equipment much of which is heavily invested in engineering and IP. So particularly for the accounts in the capital equipment end markets, particularly steel and the oil patch we are shipping equipment largely into China into Russia to build an infrastructure there for whether it be steel mills, whether it be for galvanizing lines, whether it be for oil drilling. And our products are a central piece to most of the infrastructures being built. So not only do we continue to see higher margins on those products but they also come with a tale of parts and service which get significantly higher margins to boot.

Also I would point out that the domestic business which has been very soft for the last couple of years, particularly the oil business, has started to rebound and we are seeing some capital investments there particularly on the parts and service side which come with very high margins. That business is a little bit hard to project on a sequential quarter relative to margins principally because, for example, as we mentioned in the past we just took a $18 million order into Kazakhstan very difficult to project. That will be a job which will produce very high margins but then we have to -- after that product ships we have to -- there might be a whole in the schedule for 30 days or 45 days. So it is a very lucrative business. It comes with a very good tale of parts and service. It can be extremely high margin but it also, the margin can actually start to jump around a little - some on you.

So the sequential increase in margins there is really mix related? Was there anything unusually negative in Q4 in addition to that?

No, it was just a good mix for us in the first quarter.

Okay. And are you seeing anything as far as the, at least, growth from China, they start to tail that back somewhat, have you seen any kind of slow down there or what are you seeing currently?

You know we have. I'll give you an example. Our induction heating business which is a big part of our capital goods business, that not only tends to see parts and service, but we also -- we not only ship to the steel mills if you will like Bow Steel would be a big customer, a Posco in Korea would be a big customer, that business continues to be strong. Obviously there's a priority there on those kinds of investments but it's important to note that even as they build the steel making infrastructure we are also very strong in the induction hardening business which follows, the steel making business. So as they build up their automotive capacity, their aerospace capacity, et cetera, their needs for induction and hardening will be very strong. So, no, we anticipate actually that our business will continually -- continue to grow there, it might be more broad-based with more million dollars orders instead of maybe 20 small orders instead of 5 big ones, but, no, that opportunity there we have only scratched the surface.

On the aluminum business, all in, sort of big picture how much of your platform business is light truck, SUV related versus passenger car, ballpark?

What are the categories, again.

You can cut them any way you want but looking at passenger car for big three versus a light truck, SUV?

In the aluminum side? Probably somewhere between around 75 to 80% auto balances truck and off road equipment, Caterpillars, the John Deere's of the world.

And then on the working capital, the use there I guess you are attributing more towards the seasonal build. What do you see happening there for the year given that you've had some pretty good revenue growth, it still looks like that would be a use of cash for the full year assuming that revenues keep up this kind of growth?

Our comment I think on the last conference call that our expectation was to be cash positive for '05 at some reasonable level. So although I would anticipate Tom, that we do see a subtle year over year increase in working capital because of the significant growth rates we are seeing we do anticipate that we will actually generate cash this year. So without being specific I guess what I'm trying to say is we're seeing ourselves at a reasonably toward that seasonal high if you will particularly because of the AR investments in March and we would anticipate that to come down in conjunction with our earnings to make sure that we meet that goal as outlined.

Then how much of the revenues were due to Amcast?

It's very hard to track Tom. We have, as I think we've mentioned in past calls consolidated one of the plants completely and we've diverted that business some to plants, to Contiak (ph) plants and to other GAMCO plants and then we've moved some of that to other Amcast plants. So we know what the volume is at the remaining Amcast plants but it is not a good characterization of what the total volume of Amcast is because that work has been dispersed or moved throughout the organization. We have indicated in the past that we believe that 2005 will be about a $70 million revenue year for Amcast. As we've mentioned at length we see the possibility of some small hits to revenue through the summer, particularly because of GM and Ford. But in general I think that number is still accurate.

And that's the Amcast contract, correct?

Correct.

Great. Thank you.

Thank you. Next question is coming from Phillip Vocaseli of CIBC World Markets. Your line is live.

Just going back to ILS a minute in terms of the margins there. Are there further price increases that you plan to take and can that margin expand further from what we saw in the fourth quarter to the first quarter?

I think Sarah asked a similar question so without being specific, no, I mean, yes, our initiative as we mentioned again in the first quarter, or the end of your call is, is very focused on revenue opportunities. So we continue to work hard to make sure that we have reacted and retrieved pricing opportunities where we saw cost increases in '04. So that has not ended. It continues it is a very important effort for 2004. Do I anticipate that there is margin enhancement opportunity? Of course. To give you a number it's very difficult to do at this point.

Maybe if I ask it a different way, you've got tough comps in the first and second quarters and then easier comps in the third and fourth, is it reasonable to expect that you will exceed your margins in the third and fourth quarters of '05 but the second quarter will be difficult to exceed last years rate?

We are not, I think I can answer your question by saying we are not seeing the type of changes in the costs associated with buying our product that is at all similar to what happened last year. So we would -- it would be reasonable to think that our margins will hold up a [Expletive] of a lot better this year than they did last year.

That's great. And in terms of -- just going back to this aluminum, 21% of the aluminum -- 21% of total sales is GM and Ford. You are talking about --.

And Chrysler.

And you are talking about a potential 5% decrease in aluminum sales in the second quarter as compared to the first quarter sales. Is that correct?

Right but just make sure that when you do that you understand that you are talking about apples and oranges there. The 21% is Ford, Chrysler, and GM sales or sales to tiers that go on those platforms for all of Park-Ohio. So 21% is Park-Ohio, big three or tier two big three exposure. Now, separate conversation. General Aluminum which is the only business we have which is mostly automotive, we could anticipate as much as a 5% drop off in volume during the second quarter because of problems specifically at GM and Ford.

Got You. But you will be up year over year because of Amcast and the new customers you've brought on?

Correct.

I think when you were on the road with your new bond yield that there was talk about possibly doing a secondary equity offering to further delever the Company. Can you give us your thoughts around that. I know the stock has run up and come down a little bit. Where do you guys stand now on that idea?

Well, certainly our appetite has changed somewhat based on a 1.60% drop in the equity value of the Company; which based on our performance seems a little bit unusual. But I guess we will continue to review it. It is still a great interest here at Park-Ohio to be able to deleverage this company by issuing equity. But I would be lying if I didn't tell you that 60% drop in the stock doesn't take the wind out of our sales a little bit. But we are going to continue to perform. We are going to continue to execute our business plan and we will continue to observe opportunities to make that move.

Okay. Great. Thank you.

The next question is coming from Greg Hyde of Wachovia Securities. Please state your question.

A quick question for you guys talking about all the quoting activity, is the quoting activity spread around as well or is it more in connection with the transplant?

Are you talking about in the auto?

Yes. Excuse me, with respect to GAMCO and the aluminum business.

It is, I would say the majority of what I consider real activity is on the new historical -- the new Amcast relationships.

That's about to the extent that you guys were successful in being named on those contracts. That would begin to roll on in mid '06 or how would that -- could you give us a little color as to when you expect to begin to see some of that?

Well, the contracts that we are quoting on right now are long-term contracts if we are successful and we will be successful at some of them, are really -- start rolling out on the volume side in the latter part of '06. We are not interested, although we will if given an opportunity, we are not interested in taking business from another aluminum supplier. We are not in the business of reducing prices and taking on new business. We are in the business of trying to build the Company with long-term contracts. If we are going to make the type of CapEx required for a big platform we would not even consider it if it wasn't a five to seven-year commitment. So we are being very cautious to try to build this business with the long-range thinking. We are not in the business of taking -- some of the business we got at Amcast was below our expectations and we don't have that business any more. So we walked away from some of the business at Amcast.

But you really won't see any major growth until six, seven and eight. But that's not to say that the full impact of the Amcast business is not felt. We don't talk about it much but in the aluminum business we can grow internally. We are doing a tremendous job of growing internally in the off road vehicle market, the people -- construction equipment, people like the John Deere's of the world and others. So we are not only relying on expanding our auto business. We see and if there is any one bright spot, new bright spot in the aluminum business is our ability to move over into different markets outside auto and quite frankly into trucks. So we see a lot of opportunity in the aluminum business.

My last, Matt, I think you had mentioned you lifted off that you are seeing strength across the board. I think towards the end of your list there you mentioned seeing strength from government contracts and also new customers, I wonder if you can talk a little bit about new customers and is that a big input or just a sort of smaller thing and to what degree is the new customer, a customer to whom you are cross-selling new items to or is that truly a new customer license there?

In the ILS segment particularly in the military side this is a whole new initiative for us, to be over in some of that business. We are gaining a lot of new customers across the board in this company. But they are not -- when you get up to a run rate of this size what's a big -- what's an impact customer? We are still adding a lot of people at 5 and 6 and $7 million accounts here and there. So there's not any one great new customer but I think you will be hearing in the near future about the substantial growth opportunities within our current customer base. That will be an important part of the story in the near future. One think Greg, obviously today's $2 million customers are tomorrow's $20 million customers. I would say that although on a percentage basis it was a small percentage of our growth year over year the half a dozen customers we added in the first quarter are the kinds of customers that can grow to be large accounts.

The last thing is, obviously your working capital assets grew in anticipation of what's been coming down the path. But trade accounts payable actually contracted by about almost $10 million. Could you just provide a little bot of color on what happened there?

They've dropped off a bit there. In terms of the timing of purchase in the fourth quarter and the first quarter, that affected it to some degree. I think to some degree we just pushed harder at the end of the fourth quarter and let up a little bit in the first quarter. I'd expect that to revert to a more normal pattern in subsequent quarters.

I think that's it. Thanks very much.

Thank you.

Thank you. The final question is coming from Sarah Thompson of Lehman Brothers.

Can I just ask you one more on the auto, what is the base number that you are using at as GAMCO as a percent of revenue, of your total company revenues?

I'm sorry, Sarah, can you ask that again.

When you guys are giving these numbers what are you assuming GAMCO is as a percentage of total company revenues?

Well, it's the Aluminum Products division. It's the segment that's reported in the press release.

Right. I know but if I look at it it's like 19% for the first quarter and maybe 19.5 if I do the last six months and you guys are giving 21% as your exposure to Ford, GM, and Chrysler and you obviously have other customers in there so I'm trying to back in to how you are calculating that number.

Well, Sarah, what I can tell you is not, as we've mentioned several times on this call, not all of GAMCOs sales are to automotive customers.

Right, which would then make the number go the other way.

Which means that General Aluminum represents the lions share of that 20% or 21% but not all of it and then there are odds and ends of auto business around the rest of the business.

And those ILS and manufacturing products.

Smattered in all segments of the business. For example, in the induction heating business we sell some stuff to Ford for induction hardener, a small account, we service them a little bit. So, yes, there is a smattering of tier and direct big three business around the rest of the business.

Do you have any idea in terms, I can follow up with Rex off-line. That's fine. Thank you.

Ladies and gentlemen, thank you very much for your attention. Hopefully we will gather again after the second quarter with positive results. Thank you very much for your support and have a nice day.

That does conclude today's teleconference. You may disconnect your lines at this time and enjoy your evening.