Park Ohio Holdings Corp (PKOH) 2005 Q3 法說會逐字稿

Good morning, and welcome to the Park-Ohio 3rd Quarter 2005 Results Conference Call. [OPERATOR INSTRUCTIONS] After the presentation, the Company will conduct a question and answer session. Today’s conference is also being recorded. If you have any objection you may disconnect at this time. 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 their actual results from those projected.

A list of relevant factors may be found in the earnings press release as well as 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 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 non-GAAP financial measure, as defined by the SEC. The Company may present EBITDA, because management believes that EBITDA is 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 October 31, 2005. Following the presentation the Company officers will take your questions.

Now, the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer. Sir, the floor is yours.

Good morning ladies and gentlemen, thank you for joining our presentation. At this time, I would like to turn the discussion over to Matthew Crawford, COO and President of the Company.

We are especially pleased of the 3rd quarter results, mostly because of the more than 16% increase in sales year-over-year. The more than 26% increase in EPS. But really, most importantly because of the rest of our business units which continue to perform very strongly in what is typically a weaker 3rd quarter and it did so in spite of a couple factors or “winds in their face” if you will, including notably a $700,000 increase in natural gas costs during the quarter.

Specifically now, sales were up from just over $200 million during the 3rd quarter of 2004, to just over $234 million this year. Earnings per share, I should back up and say also that the $234 million in revenue for the 3rd quarter of ’05 is a record sales quarter for this Company.

Earnings per share were up from $0.36 last year to $0.45 this year. That is after taking a $0.07 cent charge for what management used as a maximum liability associated with the Delphi bankruptcy. EBITDA was up from $15.470 million to $17,434,000 or an increase of 12.7%.

During the quarter we experienced a cash flow, or excuse me, our bank borrowings were up $1 million during the quarter. That is principally due to the acquisition of an ILS competitor, PPG. The PPG acquisition closed on July 20th. It was an asset purchase. The purchase price will end up being between $7.8 million and $8.6 million and it was structured as a $7 million cash payment up front with the remaining somewhere between $800,000 and $1.6 million paid in a one-year note.

So what that tells us about cash flow is we are down about $6 million for the quarter. Our funds that are currently under the bank agreement that we can use at our discretion is approximately $47 million, or were approximately $47 million at the end of the quarter.

Going to the individual operating units, ILS sales advanced strongly at 23% from $112 million to approximately $138 million. The PPG Business, represented about--which represents approximately $60 to $70 million worth of annual sales added just over $14 million during a partial quarter.

Sales growth after the acquisition were up approximately 10% representing continued new customer activity, strong sales in the heavy truck industry, bus industry, the appliance industry, power sports, construction and plumbing equipments. We had a number of industries that showed strong growth during the 3rd quarter.

EBIDT at ILS advanced 32% from $6,216,000 to $8.2 million reflecting ongoing margin improvement activity. EBIDT margin was up from 5.5% to 6% and the added volume, which helps us leverage our cost of our overhead.

Moving on to GAMCO sales increased 3% during 2005 versus 2004 3rd quarter, from $35, 741,000 to $36,816,000. The lower growth rate than we expected was principally due to a reduction in many customers' expectations or requirements, although most notably, Ford Motor Company was off significantly, especially in their larger SUV units.

EBIDT fell during the quarter from $2.235 million to $1,515,000. Three principle reasons for that. First, energy costs spiked during the 3rd quarter year-over-year adding additional $350,000 worth of costs. Secondly, the benefits relative to the plant consolidation we talked about down in Richmond had been pushed back a little bit, so they have not come online as fully as we expected at this juncture. And then third, the reduced volume has not allowed us to leverage the overheads as much as we typically like. So there were some reduced sales activity which has hurt us in the 3rd quarter and we expect will continue to hurt us in the 4th quarter, although as it relates to our strategy around natural gas and as associated to the consolidation plan at Richmond, we expect substantial traction during the 4th quarter.

Lastly, our manufactured products group, sales were up 12.5% from $53 million to almost $60 million. This represents a sales growth driven by continued strong demand in our aerospace industry for our forge group, a rebounding, especially in the larger airplane market, with the big buyers on the commercial side. Our military side stays as strong as it has been in the past. But the story again this quarter, I think was largely the considerable and ongoing strength in our capital equipment group.

Specifically in the capital equipment group, the oil and gas markets are red hot. And our order backlog continues to grow significantly as global company’s require our equipment to increase their mostly drilling capacity.

Secondly the forging and heat-treat market are rebounding quickly, which have allowed required increased needs for our induction heating products.

Thirdly, our investment in Asia are starting to pay off as we expand our service and after market products on a worldwide basis.

Lastly, I would say that each of these trends we see no sign of going back. Our backlogs initially are building and I don’t see any change in the foreseeable future.

Also our EBIDT grew from 15.7 % from $5.2 million to approximately $6 million. Our margin was up from 9.8% to 10.1%, which is especially significant in light of the increased costs for natural gas at the forge group.

Last a quick not on working capital, which is basically flat quarter-over-quarter, an increase in accounts receivable due to the PPG acquisition was more than offset by an increase in accounts payable and a modest increase in inventory was due to the acquisition as well as the fact that our pre acquisition numbers went down slightly. Our inventory dropped a little bit in the 3rd quarter, ex the acquisition of PPG.

With that I will turn it over to our Chairman and Chief Executive Officer, Edward Crawford.

It is hopefully clear to everyone that Park-Ohio's balanced business portfolio, where one portion of the Company is logistics supply chain management and the other is manufacturing, is continuing to serve our stakeholders in a very positive way.

Three comments about ILS. Hopefully you happened to pick up on September 27th we announced a new and expanded relationship with one of our very old key and core accounts through ILS International Truck. This contract is--not only is it represent some $500 million in sales over five years, it is an expanded contract bringing us to a broader relationship with them in types of items supplied, point of views and this is the prototype of the continuing ability to grow within our customer base, ILS, in need for those particular services.

A quick update on PPG, which we completed in July, that was what we called the bolt-on to ILS. That process began in July, it's well underway and we feel clearly that '06 will be the year when that impacts the overall performance at ILS. But we are pleased that post-acquisition that we feel comfortable about what we have accomplished there over our overall costs and more importantly, a lot a new great customers and some great new employees so that transaction is complete, it is well underway to being due to shakedown crews, but no surprises and a lot of good news.

A quick thought on the aluminum business, this is a business that we continue to be very optimistic about. I know everyone's concerned about the major shakeup in the auto industry, the potential of official bankruptcy, incidentally when you think in terms of our business on an annualized basis with Delphi being approximately $8 million, I am not pleased with the $700,000. But clearly based on receivables at a normal flow, we managed our exposure there, I think very well. I am proud of the group that were hands on there. We have come through this with still a very strong relationship with Delphi. The majority of our parts there were single-source. We believe that we can continue to grow with that Company that, in fact, that particular account has—it's never been any stronger and it's causing our product [inaudible] division to really run 24/7. So there is some good news in that, no one likes to write off $700,000 but when you consider the exposure in that particular account and the rumors for a long period of time that it might go Chapter 11, there is the good news is I think it was managed well relative to exposure and more important to come out of it with a good relationship with the Company, with Delphi going forward.

Again the aluminum business and when you look at the total Company, that is without question the largest single consumer of energy. And, let’s just give you an idea from a manufacture viewpoint, four years ago when you got a bar of aluminum it costs really $.04 cents a pound to melt it. That is what we felt it would cost us to melt it and get it in the furnace to make aluminum parts.

Now that is somewhere between $0.12 and $0.14. The answer to that clearly is hot metal and our Company is now, along with the acquisition of Amcast, moving into the area in size in which we are a very substantial purchaser of aluminum and our goal is to move towards hot metal.

Clearly, this is an important part of the future but it takes volume and as you have a—our strategy works and our strategy in aluminum to remind everyone is that we are diversifying our customer base. So we're selling all the transplants, all of the big companies, the tier-ones. We're coming at it from critical safety points, we're coming at it from a broad, very broad, machining, casting view point and all of this put into the casting.

I really believe we have a strong strategy there and although everyone should be nervous a little bit about what will happen in the auto industry, I will assure you there'll be automobiles made in America if there is one good aluminum Company making castings and machining; hopefully it's General Aluminum. So, I haven't lost my enthusiasm for that.

Matthew talked briefly about the—the capital goods of business in that Ajax Magnathermic and PMC where the revenues are as far as the eye can see, but the important part of that strategy there is we are concentrating and developing backup sources and making the parts in the capital goods business as—as we've said over and over again, we are in business as a capital goods equipment area where there's a follow through in parts so when things slow down, there's a parts business. We expect to be making most of those parts that we can at the low end in our facilities in China, which incidentally are doing very well.

Overall it was a good quarter, and right now we continue to run the Company with caution. Again, we are all about trying to be the low-cost producer of a quality product. And I think we continue to accomplish it. This is great and it is nice to have the record sales for the quarter, but this all about earning money and continue to progress as we go through the future.

So, again, I started with this concept of a diversified portfolio. This is a very important character, or part of the character, of the company. So, the supply chain management in manufacturing, in capital goods, and aluminum, I think this does, as I have kind of before represented, a bright future for all the stakeholders in the company.

At this point I am prepared, with everyone here, to answer questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Phillip Volpicelli with CIBC. Please go ahead.

I got two questions to start off with. ILS seems that the margins improve year-over-year, and were a little bit better than expected, and that is good news. I was just wondering how much the acquisition helped you there. And then on the GAMCO side, could you give us a little bit more color on either hot metal or how you are going to save on energy costs and what we might expect for margins there, which I think were a little bit worse than expected?

Okay, this is Matthew. I will jump in on the first one Phillip. Right. The – I am sorry. The question was what ILS margin--what specifically?

It looks like it was better than expected –

So, how much income from the acquisition?

Right.

Well, since that's a bolt on acquisition. It is extremely challenging to break that out at this juncture. We had mentioned that when we bought the company, we had expected it to be moderately accretive. So, it is hard for us to track that at this juncture since we have gotten rid of so many of the people that were at the, sort of, management level at the target. So, I would say at this juncture, we are on track for the acquisition to be moderately accretive. I think it was moderately helpful in the 3rd quarter, but clearly I think that the margin increase year-over-year was [accustomate] more toward the work that we are doing on the margin enhancement front whether it be with price increases or working with our overseas vendors.

Okay. Great.

Phillip, on hot metals. I do not want to bore you with this, but when you think of aluminum being smelted and being cooled at the facility in which the smelting is done and put into 40 pound ingots, then transferred to a facility like ours, at let's say at Conneaut in OH, you take it off the trunk and you have to melt it. It costs $0.04 to melt it. So, you get the originally, now that is a lot more. It could be $0.12. It could be $0.14 a pound. It is a very important part of it. The way you approach this is clearly the technology, particularly in the last couple years has changed, in which hot metal; and there certain types of trucks that have been developed, they look like thermos bottles, in which you can put the hot metal in and for the first time you can take the hot metal, maybe as far as 8 hours. Four years ago that was 2 hours. So, your ability to take it from a location, in which the smelter is located, and transport it to your facility in a hot condition, obviously you save; number one the cost of reheating the metal, but more important, you can buy the hot metal at the production level for less money. The key to it is you have to be able to consolidate and part of the strategy, this is all about alloys, we--in our aluminum business, use six different alloys, but we have been concentrating on one particular alloy, developed a bigger portion of the business and one contract we are going after right now is a very, very sizeable, sizeable contract in this particular alloy, which would enable us to put it together with our other current buys in alloy and start to get to that goal. Clearly, this is something that we want to accomplish, but when you are selling aluminum, for every dollar in sales, $0.40 to $0.45 of it is aluminum and that is a big number.

Right.

So, you are going to be able to buy it, and there is a swing here anywhere you can--anywhere from a $0.04 to $0.10 a pound. Depending on handling and so forth. So, it is clearly our initiative would probably be to be in our own thermos bottle trucking, handle it ourselves, buy it hot, transport it to our plants, and try to concentrate on one thing. But I would tell you something, it's the only answer, but this is all about volume. And that is why when you acquire a company like Amcast you add a tremendous amount of additional volume to the buying base. And incidentally, 75-80% of the alloys used in that facility were the alloys we were interested in. Okay?

Okay.

So, there is a manufacturing mentality to where we are going, but we will get there. Because downstream energy is not going to get any cheaper, and fortunately, historically you have been able to pass this along to the customers, but that is not the answer. The answer is to be the low cost producer, and to be in that business, you are going to need hot metal in the future.

Okay. Just looking forward to the 4th quarter. It sounds like ILS will continue to comp positive on a margin and aluminum will buy comp negative on a margin basis?

Yes. I think that is a reasonable assumption.

We do not want to get into too many comments about looking at this as a quarter-over-quarter, but we are out there with a view of the earnings for ’05, and we are still in the same range. So, we are going to work as hard as we can in the 4th quarter, but it is really difficult, particularly in the economy and everything else like we have today in the aluminum business, and everything else, but look at this thing on a 90-day period, but we are going in the right direction, let’s put it that way.

Got you. I appreciate that. One last question, in the past you have talked about some sort of E-leverage transacting, whether it would be a secondary equity offering or possibly an asset sale. Can you give us an update on where you guys stand on that? Is that still on the table, or is that something you have taken off the table?

This is Matthew, no it is not off the table. I do not know that I have a lot more to add, other than we continue to seek the right opportunity, and whether it would be the sale of a business at a good multiple or if it would be able to raise equity in a way which does not take our operation tier offline and focus management on something that is anything other that is a good deal for us. We are still looking for either one of those opportunities.

Nothing imminent though?

Pardon me?

Nothing is imminent?

Well I would not comment on that either way but no, let’s just say that we continue to explore our options.

Great.

Our next question is coming from Tom [Clamka] of CSFB. Please go ahead.

Can you talk a little bit on the aluminum side about what were the trend you saw during the quarter, and then as you roll into October. What has been happening to the top line there?

Well, I do not see any increase in the volumes. I, on the other hand, you are going to have a certain annualized down in the volume, quarter-over-quarter. We do have the holidays coming and so forth and we do not know -- it is interesting and I would like to be smarter, or as smart as some people, because no one has any idea, at least in my opinion, if they are going to make cars in December or not. If you knew that, you do not have the slightest idea what the -- you think you know the inventories by how the lot--and that Ford and Chrysler, and so forth, with the discounts and everything else. One of the things that is important. The way we look at it is that is a flex that is out of our control. The cost of running the units are not. In our view, we are already looking, quite frankly, that for the first time this year, we are going to be closing our facilities between Christmas and New Year’s just as a strategic decision on behalf of the company because nothing gets really done in those weeks. We are going to have to wait, and quite frankly, I could not answer that question if you came and asked me, or called me on December 1st, I might have a better view but, when they decide if they are going to run the cars, fine. If not, we will have a slower than expected -- or last year I think we got surprised that the buying was more than we expected. So, it is really, quite frankly, I do not think I could answer it, and I am not trying to be evasive. I do not think I can answer that accurately. But our issue is if the business is not going to be there, we are a manufacturing-oriented company and we just have to be ready to cut our costs and not float in there with a big fat overhead. .

True.

That is the one thing we can control. We can't control the sale of the cars.

Right, and you mentioned the Ford SUVs especially, and we saw that in the last couple of months as far as auto production. Do the large products for the larger trucks carry a bigger margin for you guys?

Not really. Quite frankly, no. In the off chance of that, and again, one of the reasons we acquired Amcast, and again, you got to go back, think of Amcast in a way that it was all critical components completely different formats, so where we might have lost, and will loose some there is—it has projected, is some of these bigger trucks and everything else and SUVs go back. We can get that volume. We should get that volume, but our new relationships with Honda and Nissan and a variety of other companies, particularly in the critical safety parts. Another interesting thing about the, the aluminum business that we – somehow we always get around to talking about the trucks and the cars. Let me point out that our success in the agricultural market, particularly at John Deere, is-- if you want to look at any segment that is off the charts in our whole company it is our participation and our growth within the aluminum business within that particular segment of the market place, the aluminum. So, we are very, very aware, and have been. That is why Amcast and critical safety parts, as well as, a diversified – getting directly into the transplants, either on a direct basis or through tier one and combining that with an all out initiative to involve our self in with the companies like John Deere. And I point them out because we are currently very active with them, and that market is very, very strong, so, we --- four years ago, General Aluminum was a company that was sitting there and basically had two accounts, Ford and Chrysler. And they did very well, and this part of the segment has -- if you look at all of the companies that are publicly traded in the aluminum business with casting, machining, we have done very well. We have done very well because we have a plan. We are a low-cost producer and it is working.

All right. Okay, and then just quickly. I do not see a cash flow statement. Can you give us, again, what the working capital swing was in the quarter and what the CapEX was?

CapEx for the quarter was 4.7 and if you look at a non-cash working capital we stayed essentially flat despite the addition of about $12 million of working capital as a part of CPTG.

Okay. Great. Thank you very much.

Our next question is coming from Greg Hyde with Wachovia Securities. Please go ahead.

You mentioned about the hot metal, which was very, very interesting, but with respect to the gas that you are consuming, do you all hedge for that or did you just buy that on a spot basis?

We use a combination of strategies so depending on what particular – our particular needs are, what time of year, where the markets are, we have times where we are completely hedged, and we have times when we are relatively unhedged. So, it is -- I would characterize our position at the end of the 3rd quarter as more unhedged than hedged. So, for what that is worth, that is our current position.

Just shifting a little bit. The international truck deal that you guys announced toward the later part – end of the quarter, you talked about that being a $500 million contract over 5 years. A couple of questions on that. Firstly, could you just give a little it of color of how sort of the ramp looks on that, first hand? Then on the second hand how you all--if the price negotiation that will take place across that portfolio product that you will probably provide, sort of how that is going to look and if it will be any different than how you approach other fairly larger contracts?

Let me point out first that the international for the significant shares of those estimated revenues. We are already servicing them with those products. So, the lion’s share of that revenue number you characterized is – we are already seeing today. So, the ramp up in those additional dollars, I don’t have in front of me, but what I would tell you is, it's a relatively small percentage of that total revenue opportunity. So, maybe we would see out, I would call it 24 months from now, an additional $15 million with them but the lion's share of that is in place. So that is your first question Greg. I’m sorry what is your second question?

I guess it was just on the negotiation of the prices on that but it sounds like that’s really just going to be a continuation, this is really more of an extension—

Yes, it is an extension with--with some extra--extra volume, what I would tell you is international is a great example of a company which we provide a vast majority of non-fastener products and fastener products, so we have a very complex and deep-rooted relationship with them and in many cases, we are doing services for them which are a straight sort of pass through type things where we are just charging a small up charge on a service product that it would be difficult to characterize the overall, but I would tell you that it's--you are not going to see something atypical in the margins than you have seen over the last couple of years.

And Greg, this is Edward again. One of the things that I want to additionally comment on, one of the interesting about the growing model of ILS is that each time I go back to major customers like this, we talk about different things we can do in the ILS model that we haven’t done before so although on the surface there is not a lot of new business here, the type of business that we are working and developing with them is a little bit outside the current model of ILS. I don’t want to spend a lot of time on that, but our ability to continue to grow with this company is to show them we can do other things other than the point of use and a supply chain management is all about what we can do for the customer, we keep trying to expand the relationship and it is not around, in this particular instance, it's not around the historical we buy and point of use. So and--when it works with a big company like with international then we can get the same concepts going with other customers of less volume.

One last question, that is with, I'm afraid I just don't remember, within aluminum products as you think about your mix there, how much of that aluminum products type of revenue is going into SUVs as opposed to cars and other. If you're to sort of slice open the three pieces of the pie, how does that sort of shake out?

Well, I don’t have the numbers right here exactly SUVs but when you put in all the cars and everything else it is a portion of it but it is not something that is overwhelming.

So it's the [last of] the overall of the North American mix I guess [indiscernible] north of [15%]?

Yes.

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

Let’s go back to that revenue break down for the aluminum products. How much of that revenue mix is non-auto, non-truck at this juncture? You mentioned that this is in the area of growth for you. Just some comparisons from what to what.

Somewhere between 10 to 15 that would be out of the auto and truck area.

Okay. And I am presuming that has grown materially in the last few years?

Yes, it's by design.

Right. Okay. Also, if you look at the PPG acquisition and you look at the margins when you acquired the company, were they close to where ILS margins were? Were they better, again I am looking more for comparisons than actual hard numbers?

Right. Richard, it's Matthew. No. When we acquired them it was a company that was in trouble, I mean quite frankly, I think we got a very good deal, principally because it was not really marketable to a non strategic buyer, so we bought a business that was more or less break even. So our--the best that we could do at the time and to continue to be able to do is to say that we expected it to be—help sort of modestly during the remaining portion of the year. I would tell you that we feel very comfortable that it is at this point profitable and helping the ILS segment, but at the same time I would tell you we have got some work left to be done to get it to where it would be equal to or to help our ILS margins.

Okay, if we could just dig into that just a little further. Obviously, there are headcount reductions related to absorbing a business, I am presuming also there are some ILS processes that the way you handle your business that you need to implement with them. Is there anything else in terms of bringing those margins up? Was there a pricing issue that you need to address as well, etc?

Yes, I would say—I would answer yes is the answer to both of your questions. The first is maybe one of the big opportunities you left out is warehouse consolidation on the cost side, so there are one of the things that attracted us to PPG was the number of locations which we also had warehousing facilities. So that was a fabulous opportunity for us. The second cost thing that has to be considered as they have a much smaller competitor to ILS did not have the access to offshore buying that we did. Whether it be because they didn’t have the sourcing people in place around the world, particularly in Asia, or whether it be because they didn’t have the volumes to get to those access, those vendors. The opportunity to reduce cost will be helpful. Relative to the customer base, there were some customers that needed to be addressed quickly relative to what we consider to be pricing that was well below market. We have done that at this point and that is why we estimated comfortably and I think I said today on the call, we saw a $60 to 70 million type run rate business. That would have been down slightly from the business we bought and anticipated the fall-out of some small customers. So, we think for the remaining customers, the pricing is solid based on what we think we will have in margin after we get done right siding the business and getting better deals from our vendors, so because of that, we think that our return on assets is going to be something very similar to what we are seeing at ILS and if we need to, at that point, to go back and readjust pricing and keep customers great, but I don’t think we’re going to have to do it.

All right, moving onto the other significant acquisition that I think you also got at a good bargain Amcast. Is the consolidation/absorption pretty much on target and pretty much completed at this point? And where are we with and also in regards, where are we with the Richmond consolidation?

The Richmond consolidation is not on schedule and what I am saying we moved in there on basically July 1st. Quite frankly I would have expected that this would be humming at this particular juncture. It is not. And one of the things that has been more difficult there than we anticipated was the bringing on the skilled labor force there. We moved out of Wisconsin, we are at a great skill labor force will work itself out, but quite frankly, that one is dragging its feet a little bit and probably will for the balance of the year. We have got our first team there relative to the manufacturing side of it. I have been there myself four times in the last two months now so I am very much involved there. We'll get it solved. It's nothing terminal, just starter problems, and I wish–

They usually take longer than scheduled.

Well in this particular case, I am a little inpatient about that because of the planning but quite frankly, you are right, it is taking longer than we anticipated. But now one of the things about these acquisitions and I said earlier, when you get finished with them and you own them, when you buy the car and buy the house and you actually get in to look around at the plumbing so I want to make sure that all your due diligence was made [set]. So I can just tell you from PPG and Amcast, what we bought and what we thought we bought and sometimes it moves a little bit slower, but no big surprises and that is the important part of the--and we think we are very good at acquiring good assets that bolt on to what we have and we had a little surprise but no big—no rotting rudder.

Sure, okay. A couple of minor things also that international truck contract. It is an exclusive now, was it always an exclusive or has that shifted?

Well in those particular parts, yes.

Okay, all right. And also, you mentioned the oil and gas business on the manufacturing side was strong, could you give us a rough sense of how big a part of the total that is?

You know we, Richard, we have made a habit of not breaking out these numbers, I would tell you that—

I always try—

Yes you always try and I will just--it is a significant portion of the manufactured product revenue but not more than half.

Okay-

I will tell you it's one to watch because our proprietary designs and capital equipment there allow us to get great margins and I just can’t tell you, this is the kind of stuff that is 18 to 24 month backlogs and so we really have a good sense of what we are seeing out into the future and I just couldn’t be more excited about it.

The one plug I would like to stick in there for Crop Forge we keep forgetting about little Crop Forge in Chicago making the landing gears in the aerospace industry, I mean that is white hot and will be for a long time, so that is a very solid business.

And I am presuming also the backlogs there are pretty lengthy?

Yes. As far as we can go.

Right. And one final thing, if you could give us a sort of give us a little update on China I remember going back, I don’t know if maybe a couple of conference calls ago, maybe even more, I don’t know you talked about having gone over there and them being somewhat interested in ILS as an operation as well. Could you just bring us up to date on what China is meaning for you generally and whether you get any involvement with ILS there?

Well, let’s go back to the theme and we have a strategy here, remember we called it the Park-Ohio portfolio of the mall, the Park-Ohio mall in Shanghai. The concept is still exactly in place. We have a rubber position there in which we are starting to grow that to the point where we might have to consider relocating separate better data initiatives on the way. Ajax Magnathermic making parts for Asia is in place there and I think we are shipping two customers out of ILS and our expectations in China are, keep in mind, are there to service that marketplace and we are, it is a--we own the corporation is not a joint venture. Though, we have a first class team over there, okay, [thrift] young people [indiscernible] but we are not going to get ahead of ourselves in China. We are not going to make a lot of big capital investments. We are not going to go in there and try to hit a home run in the World Series. We are still an American company and we have a foot hold, we think we are being strategic about it, but the Park-Ohio mall concept is very much in place, it's going to stay in place and we are going to incubate companies over there of our own and for shipments into that marketplace, and if things go the way everyone thinks they are going to go we will have a nice operation. But it is not something--we are concentrating, we believe that there is still going to be customers, there's still going to be opportunities in America; particularly in the auto-related industry, our first thoughts come to being an American, logistics supplier manufacturing company, low-cost producer, and yes do we want to play into China, we will like in Europe, but generally speaking, we are still very focused on making a profit here in North America and being a survivor.

Right. Okay—yes, I'm sorry, go ahead.

Richard I just want to add one thing. To quantify it, we are doing something called mid-single digits for ILS out of that office right now.

Right. Okay.

So we are up and running, what I would characterize as significant about that is, we have moved resources form ILS domestically to lead that charge in Shanghai so we have got a great team in place and we have got a small platform to get going.

Great, that is about it for me, thanks very much.

The next question is coming from Chris [Daughtery] of Jeffries. Please go ahead.

A little clean up, just sort of administrative—The Delphi reserve, was that a hit to [cogs] or was that a hit to SG&A?

I'm sorry, I couldn't hear what you said.

The reserve for the Delphi, was that a hit to [cogs] or was that a hit to SG&A?

SG&A.

It was SG&A. And then to put an [extent] on Edward's comment. In terms of the revenue base and what's growing. Is it new customers or is it trying to get more revenue from the existing customers--?

In which unit—in which unit are you talking about Chris?

ILS in particular. More just looking at the ability to achieve more operating leverage. Now clearly you've shown some good revenue growth in the businesses and it's not sort of going down the EBITDA level as well, but [more in] terms of operating leverage.

Well, if you look at the last quarter. Let's just talk about the strategy here a little bit okay? The strategy is different customers, obviously selling more to those customers okay? And the—the development per—outside the acquisition, the development of these customers are important but I would still say in the overview, 75% of the growth still should come by us shipping more to our new customers and 25% to brand new customers. Internal growth is, and it's still an important part of that, because we believe our customers, like particular international others, will—we can do more business with them as—as the model of—our model of supply change management. Keep in mind we are not a trucking company. And sometimes we have a hard time making that clear to everyone. We are in the supply chain management business and we are to point of use. And that's a complete different model than most. So we think we can go to our customers and continue to grow our business with them. And that's the most sufficient, low-cost way. Developing new business is not—is not inexpensive.

And I think that's sort of where my question comes in to, is if you can get more business from your existing customers, hopefully—it more falls down to the bottom line. So—

That's certainly Option-A.

All right, that's it gentleman. Thank you.

Our next question is coming from Kathy Nolan of Solomon Asset Management. Please go ahead.

I was just wondering if the Company has a debt reduction target or expectation for the 4th quarter?

Yes we do. Certainly Kathy, we've talked throughout the year, me mostly, about trying to be at or below last year's ending balance which I believe was about 121 million. Because of the acquisitions, because of more growth than anticipated, both at ILS and certainly in the—in the manufactured products segments, that looks unrealistic at this juncture. But if we think about the $7 million cash payment for PPG, so that would make the 121 128. I feel like we're not going to go beneath that goal. Our expectation is we will be up, call it 5 or 6 million on top of that. To support the growth.

Okay. So 128 plus 5 to 6 million.

Right. So we're talking sort of young to mid 130s, which as you know, it sets a pretty high goal for ourselves. Particularly in light of the fact we have our bond payment coming up shortly to the tune of 8, high 8s.

Okay.

So we've got our work cut out for us but historically the 4th quarter has been very strong for us from a cash flow perspective. What I would tell you Kathy is the wild card is, hate to keep talking about it, but the manufactured products the capital equipment segment of our manufactured products is so strong right now, when and how a particular large piece of equipment ships can vary that number by multiple millions.

And just along the housekeeping end of things, do you have the year-to-date cash flow from operations number? And I missed the PPG sales number contained within ILS for the quarter.

No. We did give that and it was, I think 14 million approximately Kathy. I'm looking for it in my notes.

14.7.

14.7 million.

Is what? The—

The additional revenue from the PPG acquisition.

Okay.

So we had 14.7 million of acquired revenue and a 10% growth number internal, or ex the—the acquisition.

And the cash flow from operations year-to-date?

Kathy I don't have that in front of me at the moment. I can—I can provide that separately.

Okay. Okay. Thank you.

Our next question is coming from Sarah Thompson of Lehman Brothers. Please go ahead.

Actually all of my questions have been answered. Thank you.

That's impossible Sarah. But thank you.

Our next question is coming from John [Baum], a private investor.

Most of my stuff has been covered too. Some of these are housekeeping. Full year CapEx, what are you looking at for 4th quarter?

Still looking at a total of about 15.

All right. Thanks Richard. On the energy price increases, are you seeing any moderation of that? And looking forward and especially as you try to start passing this through on the ILS side, could you drift a little bit of the leg right there and hopefully once these things start moderating, will there be a leg then also in the pricing?

Well we are obviously watching the natural gas markets very closely now as a sort of step in our favor most recently, yesterday I would be curious to see how things go today so if we have an opportunity to improve our hedging strategy, we will. Having said that, I would tell you that ILS doesn’t see a lot of natural gas, its indirect to the extent that our vendors are seeing energy cost increase it is more meaningful to us. They tend to absorb most of those so because of that we don’t see a lot in ILS, we know exactly where our exposure is and 80 to 90% of it at least on a direct basis is at Crop Forge and in Crop Forge instance, we have been working hard to capitalize on those costs, so quite frankly we have seen a little bit of a depressed margin in the last quarter despite great revenue at Crop Forge because of that so we are--as we expect contracts and remember there is 18 month backlogs there. We're playing that by ear, getting what we can, trying to apply a surcharge if we can but obviously being sensitive to the fact that the markets are moving up and down. In General Aluminum, that's a little bit more, a little trickier. Clearly that is the other half of our exposure--major exposure to gas and we are looking for opportunities at the OEM level to increase pricing but that is an uphill battle to say the least in our non-automotive OEM we're being more successful at this point passing some things through.

Specifically on that point with the--where you stand on the curve between energy prices rising at a positive inflection or a negative inflection rate and your ability to pass those through, I understand the public nature of this call, but do you feel like you are more than half the way down the field so to speak and to be able to pass this through so you should you will get some margin if not expansion- at least maintenance?

My view is this, again I always go to the idea that we can’t control the energy costs, okay, and they move, they fluctuate so quickly there is no actual relations you can have with the customers that would allow you to recover it. I think the most important thing here is to think in terms of, is energy going to be at what level over what period of time. So as you get an opportunity you cannot fix these problems at any order in any particular month. You have to have a strategy. Our strategy at aluminum is going to be different than our strategy at Crop Forge. At Crop Forge this is a very large industrial outdoor kind of building, but the customers are going to be more receptive to the long-term planning of energy costs, okay. And that really ties into your ability to get it to them but you are not going to be able to spend anything around this energy business, and no one has contracts that have been written that accommodate that that I know if, so it is a depressing view costs of energy costs and it is going to press our earnings, relatively speaking, to what they could be but there are other ways to offset that and that is through other cost controls but it is pretty hard to say that you can make aluminum and forging landing gears and use this much energy and not have it impact you for a considerable periods of time. How long, I don’t have the slightest idea.

Well, like you say the 2nd quarter, that's what management is there for and you are doing a good job. On the revolver, the LIBOR pricing, has that-- I see the interest expense is up a little on that, is that still--Richard I guess I am directing this towards you, is that going to be LIBOR-based or is that going to be prime-based on that? Are we expecting to see some additional bump on that with the increase on the prime?

It is LIBOR-based but obviously prime tends to float up above LIBOR. We have seen rising interest rates we--finally the 3rd quarter this year, despite the reductions in our risk premiums on our bank loans rising of the underlying LIBOR rates has finally caused in Q3 the rates to be slightly higher in Q3 2005 as apposed to Q3 2004, we are still very close at this point. If the fed keeps raising rates that will have some effect on it.

Okay. Two—let's see, one small item, I noticed in the last 10k there was an expansion of the asbestos disclosure in which I didn’t see in previous 10Qs I mean, is that pretty much, is the asbestos disclosure or your asbestos exposure I should say, is that moderating right now or was there a reason that was outlined a little bit more or highlighted in the last 10Q?

This is Robert Vilsack, General Counsel here. There really has been no material change in our asbestos exposure over the years. That disclosure requirement was based on the SEC requirements to expand and really highlight that area but there has been really no change.

Right. Fair enough. And lastly, on the Delphi, the $0.07 charge you took, is that—you've accrued for all of that and you figure that is maximum exposure there, do we have to await the whole reorganization plan to find out if there might be some, so many cents on the dollar being paid back or is that your best estimate of what the charge is going to be going forward?

It is a very solid number.

Okay. Very good.

That represents our pre--petition, excuse me, expenses related. That represents 100% of them so John, so the extent we received payments from them those would be income at that juncture.

Okay. Very good.

I think we dodged a bullet there so I’m happy with that.

Definitely. Excellent quarter guys and I look forward to 2006.

Before we wrap up, Kathy, year-to-date cash flow operations was $3.4 million, I don’t have the Q3 numbers specifically in front of me, but we were negative Q1 and Q2, so it is more positive than that in Q3.

Gentleman, I am not showing any further questions on the phone lines at this time.

Well, thank you very much ladies and gentlemen and have a nice holiday and see you in the near future with hopefully some positive results. Thank you.

Thank you. This concludes today's Park-Ohio Teleconference. You may now disconnect your lines and have a wonderful day.