Park Ohio Holdings Corp (PKOH) 2005 Q4 法說會逐字稿

Good morning, and welcome to the Park-Ohio 2005 Year End Results Conference Call. At this time all participants are on a listen-only mode. After the presentation, the Company will conduct a question and answer session. Today’s conference is also being recorded. If you have any objections you may disconnect at this time. Before the conference call begins, 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 in the Company's 2005 10-K to be filed with the SEC, on March 16, 2006. 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 could be useful to investors as an indication of their ability to incur and service debt, and because EBITDA is a measure used under their credit facility to determine whether they may incur additional debt under such facility.

For reconciliation from income before income taxes to EBITDA, please refer to the Company's current report on Form 8-K, furnished to the SEC, on March 14, 2006. 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. Happy St. Patrick’s Day. I’m going to turn over the reporting of the results for 2005 to Matthew Crawford, the COO and President, and Rich Elliott, the CFO. Matthew?

Thank you, Mr. Chairman, and Happy St. Patrick’s Day from me as well. The year 2005 ended on a positive note, slightly better than we had anticipated. Sales were up year over year by 15.4% to a record $933 million. EBITDA was up 13.3% to a record $73.3 million. Our reported earnings per share was $2.70, but after making the adjustments for the impact of the $7.3 million reversal of our tax asset valuation allowance, we still reported a record $2.22 which was slightly stronger than our estimates.

For the fourth quarter of 2005, revenue was up 12.3% year over year to a record $241 million. EBITDA was up sharply by 24% to $18.4 million and earnings per share once again changed for the tax valuation allowance, was still up by 74% to $0.56 per share.

Now moving quickly to the individual units, ILS posted the strongest year over year growth by increasing sales 26% during the fourth quarter of 2005 to $130 million. This number reflected the continued broad-based strength in our very diversified customer base and a notable amount of new business activity. We anticipate continued success in this area due to our current efforts to leverage our lowest total cost service model. We believe we’re the most competitive supplier currently in this space and we have revamped our international sales efforts to reflect this and it is already showing substantial results.

Moving to EBIT, during the fourth quarter of ’05 we, ILS doubled their EBIT, or almost doubled it, from 5.5 million during Q4 2004 to 10.1 million during Q4 2005. This improvement was mirrored at the EBIT margin line where we continue to see improvement increasing from 5% in the fourth quarter of ’04 to 7.3% this past quarter. This improvement is also apparent on a sequential basis. During the third quarter of ’05, we had a 6% EBIT margin. During the fourth quarter as I mentioned, we had a 7.3.

The improvement was expected. As those of you who have joined us on prior conference calls know, we anticipated this margin to begin to increase throughout the year as we implemented our new pricing strategies in late ’04 and early ’05, our improvement in our global sourcing efforts, and just overall better operating leverage as we grow. For the latter point, we often use a sales per employee number. During 2004, sales per employee for ILS was 499,000. In 2005, sales per employee at ILS was 534,000.

Moving on to the aluminum products division, although revenue was up strongly for all of 2005, revenue dropped during the quarter by 7.6 million to $36 million. This reduction reflected the bottoming out of the Amcast revenue, the assets we bought in the latter part of 2004, as well as some softening at our old GAMCO facilities principally with the Ford and the Chrysler accounts. This softening was offset partially by some nice increases in the Bosch business and the John Deere business, two new customers that we’ve talked a lot about over the last 12 months.

The reduction in revenue was followed by $772,000 reduction in EBIT. I do want to point out, though, that this included $391,000 worth of restructuring charges on the prior announced restructuring of two facilities that were closed in prior quarters, specifically in Hudson, Michigan and Tupelo, Mississippi. So actually if you put that $391,000 back in, the operating results reflected a slightly higher margin during Q4 ’05 than Q4 ’04.

We anticipate this revenue trend that we saw in the fourth quarter, although we think the fourth quarter was the bottoming out as I mentioned, we anticipate a similar revenue trend during the first half of ’05, but we begin to see some improvement during the second half of ’05 as we begin to put in place new customers and new work that will allow us a speedy margin enhancement and earnings enhancement associated with utilizing some of the Amcast acquired assets.

Turning to manufactured products, revenue was up 9.1% to 66 million. Although this strength was, again, it’s extremely well balanced from a customer perspective, continued growth in our businesses which support oil and gas drilling, as well as the businesses supporting locomotive builds, as some of you may know, we are the exclusive supplier of crankshafts and camshafts to EMD. Also, the military and commercial aerospace. Also, some of you may know, we maintain some of the only remaining large forging capacity in the industry for certain aerospace applications. Those were specifically important to reaching our ’05 goals.

I also want to note that on the induction heating front, we continue to grow our strategy of expanding our induction heating business both globally. We opened new offices in Germany and we also continue our strategy of growing in the proprietary products business by making a small acquisition in Canton, Ohio. On the EBIT front, on the surface it looks a little confusing, a significant slide from historical trend we’ve seen over the last couple of years in manufactured products. But I do want to point out that this reflects a $1.4 million restructuring charge. I’m sorry, let me back up and mention that the 2005 EBIT was 2.9 million versus 5.2 during fourth quarter of 2004. But as I just stated, 1.4 of this was due to restructuring moves that had been made in prior quarters, and actually there was a small impact in the manufacturing product groups of approximately $300,000 associated with the Dana bankruptcy.

Also, even after you build those back in, the EBIT margins for the manufactured products groups were slightly off. Those were due largely to significant capital equipment orders that were shipped out late in the fourth quarter that represented slightly lower margins than we expected. This is not a trend that we expect to happen going forward and we believe that manufactured products will move back to their historical margins going into ’06.

From a cash flow perspective, we did not meet our goal, unfortunately, of reducing our non-bond debt during 2005. Non-bond long term debt ended the year at $139 million or up approximately $8 million. These additional funds were used largely to finance a $24 million growth in noncash working capital which included the acquisition of the PPG business during the third quarter we talked about on our last conference call. And just north of $20 million in cap ex which is a historically a little bit larger number then we would be comfortable with, but I think when we get to the Chairman’s comments, he’ll talk about some of the exciting investments that are made to prime the pump for ’06.

From a bank borrowing perspective, during the fourth quarter of ’05 bank borrowings fell $11 million to $128 million which continues to provide us a healthy buffer of approximately $50 million on our line of credit. In closing, we’re pleased with the performance of 2005, particularly in light of the earnings success on top of $7.8 million of charges which were absorbed specifically related to some of the items that surprised us after the start of the year. What I’m referring to in that 7.8 million is the extra steel costs that we did not see prior years, extra surcharges in natural gas, and Sarbanes-Oxley. So I think it is proof that our business is very strong and our pricing strategies in all of our business have been able to overcome some downside surprises and still meet or exceed our goals.

Before moving onto the Chairman’s comments, I would like to ask Rich Elliott, our CFO, to talk briefly, or explain briefly, our tax circumstances during the fourth quarter and going forward.

Good morning. The tax adjustments and changes that occurred in Q4 and as we look into 2006 are sufficiently complicated and I thought it made sense to run through them in one coherent discussion. Let me first talk about the cash situation and the cash effect of our tax. In 2005, Park-Ohio paid approximately $900,000 in cash income taxes which were foreign and state in places where we were profitable and didn’t have an NOL.

We did not pay federal income tax nor do we expect to pay federal income tax for several more years. This is as a result of the federal income tax operating loss carry forward which was approximately $41 million at 12/31/05. So on a cash basis, nothing that you saw hitting income in Q4 2005 or the provisions that you’ll be seeing in 2006 have no cash effect. On the expense side, however, in 2005 Park-Ohio recorded a $4.3 million income tax benefit. This consisted of $3 million of state foreign income tax expenses in businesses where we’re profitable whether we had a net operating loss which sheltered us from the cash payments or not, which was offset by a $7.3 million reversal of our deferred tax asset valuation allowance. This reversal showed as a tax benefit and therefore took us from $3 million of expense to $4.3 million of benefit.

This tax valuation reserve was established in 2003 after a series of tax losses. We reversed 7.3 million of it in Q4. That leaves approximately 5 million of tax valuation allowance still on the books which when reversed would have additional income tax book income benefit. If 2007 income looks good at the end of 2006, I would expect that we would reverse that $5 million at that point and you would see another adjustment similar to what you saw in Q4 2005.

As a result of these, the reversal of this allowance, starting in 2006, starting with the first quarter in 2006, income tax expense, income tax provision will reduce net income. Again, I want to emphasize this has no cash effect, but it shows up as an expense on the income statement. The implication of this is that whereas in 2004 our adjusted EPS was $1.80, in 2005 $2.20, our forecast, our guidance is $1.65 to $1.75. However, that’s on a fully taxed basis. On a comparably taxed basis, comparably untaxed basis to what we experienced in 2004 and 2005, the middle of that range would be about $2.60. So the growth in income continues, but it is a bit disguised by the change in the book income tax expense which, again, is non cash. With that I will turn it over to our Chairman, Edward F. Crawford.

Thanks, Rich, Matt. I’m not going to dwell on 2005, only to say to all the employees that will be coming on line later today, thank you very much for the tremendous effort in 2005. These results are symptomatic of what’s coming in the future, but it’s all about teams, all about organization, and I’m very proud of what you’ve accomplished.

But I - - we put out the guidance here for 2006 and we’re talking about a potential increase of 15% in the earnings, and 15% on the revenue side. The first question that would come to mind if I was an investor in this company, number one, are they making the numbers? The second thing I might think about is, is this kind of result from Park-Ohio sustainable in the future, beyond 2006? So I’m going to spend a little bit of time this morning talking about our company and tell you why I believe we have the management, we have the skills set, and we have the commitment to continue growing this company.

And when you think about growth, this management team, which is largely in place, came to the company in 1992. Between 1992 and 2005, for 13 years, we’ve had a compounded growth rate of 22.4%. So I think we’ve proven we know how to grow a business. I think we’ve also proven how to make a profit while growing the business. So let’s take the individual units and talk about that, the largest being ILS. I think most of you know I come out of manufacturing and I’ve been talking about ILS and supply chain management, our style, for almost 10 years now. And we have talked about some value added that our systems bring to the customers and the reduction, the real reduction, in their costs at the beginning of the relationship and continuing over a long period of time. We are clearly the American manufacturer, North American manufacturer, the manufacturing worldwide group, is only and must be interested in reducing their costs. And we, the service we provide, and the type of customers we’re talking about here are world-class manufacturing companies. Volvo, Whirlpool, Thermal King, Eaton, Invacare. And we have relationships with them that are deep and very longstanding. And it’s all about reducing their costs.

When I talk about manufacturing, I’m really talking about assemblers, because people worldwide that are making things, really think they’re making cakes. On Monday it’s a chocolate cake, on Tuesday it’s a different type of cake. And finally, and what’s most important about that, through our systems, through our commitment of $35 million in proprietary software, we’re able to procure for them worldwide and ultimately take it to the point of use. Someone said to me recently, Ed, who’s your competition? I said, well the competition is really our customers thinking they can do it better And we always get into these conversations about if they buy something for $1. But what does it take to get to the point of use, the working capital? The quality responsibility? That’s what we take on. We’ve done an excellent job here.

This business will continue to grow because it’s real. We grow within our customer base, we can grow within and with new people. I want to point out just a couple of things that have been accomplished in this model which is really kind of our model. We’ve been at this for 10 years. But I want to get you inside the way we look at the company here at Park-Ohio.

I think some of the things are very important. For example, in the year 2000, not too long ago, the sales per employee in this company was $375,000. In ’04, it was $499,000. The 2005 numbers are even higher. We’re talking about people working hard, getting more sales dollar out per person. The other thing that is pretty important here is 2000 we did sales in this company of $482 million with 60 warehouses. We’re going to do sales in ’05 of $532 million with 37 warehouses. More velocity, harder working, better systems, fewer warehouses.

Now you come to the, I think, very important part is, what does it cost us to be in this business? Well, inventory is a big part of it. But in 2000, to do $1 in sales we needed to have $0.285 of inventory. Today it’s between $0.19 and $0.20. So all the things that are material of reducing our costs which ultimately gets passed onto our customers, they see our improvement. They see how we’re able to continue to reduce our costs and pass that onto them. So it’s sharing, they understand that we’re a partner long term and can continue this.

And I want to point out something that I’ve found very interesting, because a couple times people will say, Ed, this business, the EBIT margin used to be 8%, 7.5%. Why is it 6.5%? It’s a bigger company, I understand that, but I want to point out one thing. This is the way I look at the company and I think this is the way we all should look at the prospect of this company long term. It is very dynamic. If you take the ’05 results and take the total working capital, the combination of inventories, the receivables, take total working capital, take that number, and I can be exact and maybe it requires talking about it, but I think I can be exact. You take receivables, inventory, payables, the total investment in that business, $155 million. Sales were 532. The EBITDA was 39. We’re talking about a 25% return on investment in this business of the working capital. There is no DA, there is no equipment, we rent the buildings, and I will tell you, as coming out of manufacturing, this is the real thing. And this will continue to grow. It’s a great business, it’s a great model, we’re getting better at it, and we’ll keep on growing this business. So I think of the future beyond ’06, I think ILS is clearly a very important engine in the future of the company.

Let’s move onto the aluminum business. And this is like a three legged stool and I just covered the first leg. I think you’d all have to agree that’s pretty exciting for ’06 and beyond. Let’s talk about the aluminum business. This is the business, there’s a separate segment. This is a very troubled area for most people. We’re talking about Detroit, we’re talking about people in the component business, we’re talking about possibly companies some filing bankruptcy, some not. It’s a very, very fractured and very hostile atmosphere to make money.

But I’ll tell you, I think we have the right formula. This company has been very profitable in the past. You go back 5 years and look at this, the EBIT, look at the return of this company, it’s been fantastic. We made an investment. We bought a company two years ago called Amcast. Let me tell you why we bought that company and why we think we’re on the right track. Number one, they’re going to still make cars in Detroit. Americans are still going to buy cars. There’s no doubt in my mind about it. And the only thing that’s happened, I’m interested to note recently in one of the reports that all the people in Detroit were talking about 250,000 jobs lost in Detroit. They weren’t lost in Detroit, they just went to Tennessee.

There hasn’t been any compression in the number of cars, there hasn’t been any compression in number of people employed, it just takes. So that would tell you who’s in Tennessee, the transplants. Well you better have a strategy. And four years ago, quite frankly, we were 100% Chrysler and Ford. We’re not that way today due to this acquisition. And I’ll talk about the important part of the acquisition by first pointing at the fact that these customers that we acquired through this acquisition, the shaky critical parts are all the transplants. The coils, the handbrakes, the materials to supply them. So we have broadened our base of customers. We believe they’re still going to buy 14, 15, 16 million cars. We believe they’re going to be made in America, and we believe that if you’re the low cost producer of a component like aluminum, you’re going to get the business.

Now let me tell you the good news. When you make an acquisition like we did with Amcast, keep in mind we paid $10 million for Amcast. The receivables and inventories are higher than $10 million. So as accounting goes, you’re not allowed to assign anything other than the receivables and inventory. So the great news here, we end up with two operating plants, one somebody spent $48 million in equipment, that’s called DA, depreciation. Now we have that. We’ve been able to absorb all the changes, put all the pieces together. We bought this company, the average wage in this company as Amcast was $29.40 an hour. It’s $10.00 less today. So it’s taken us about 6 months longer than I had planned to get it put together, so what I’m talking about here is ’07, ’08, ’09. And we’re going to be successful why? Because we have lower costs, we’ve got a track record here and whoever is going to be left in the business is going to need a great supplier like General Aluminum.

Now I want to mention one more thing about General Aluminum. And again, it’s back to this valuation. Like they talked about how to look at, at least how I look at the value of a 25% return on investment capital in ILS. Let me point out something about the aluminum business. If you only make 6% on sales and you’re doing $10 million, it doesn’t look that impressive. But keep in mind, 40% of that, 45% of that, is aluminum which is a complete pass-through. Means we buy the aluminum and they pay for it at a fixed price. So you really should be thinking that. You should be thinking the return on the value or the investment on the value add, that $0.55. So 6% on 55 is a much impressive number. It’s got a one in front of it, a double digit anyway.

So this is not a business that you cannot make money. This is a business that is a hardnosed, tough, conversion of basic raw materials, and you have had and you still have, the ability here at this company to make an acquisition like that with Amcast and bring it into our model and I assure you I’m very optimistic about where this is going to come home. You know, the other two engines are running so hot right now, okay this one, I can feel a little bad about General Aluminum. But General Aluminum will show up. It will probably show up in 7, 8, and 9 because we’ve got probably $100 million in capacity to deploy without any cap ex. Now that will make a lot of sense. We’ll have to add a little bit of sheathing, but generally speaking, we’ve got a great model and I’m not giving up on the aluminum business. We shouldn’t give up on it, because there’s going to be cars sold and they’re going to be parts needed and they’re going to need companies like General Aluminum in the future.

Now I want to move onto the manufactured products. I can talk for hours on this one. This is an incredible story. There are many parts of this, but let me just concentrate on 2 aspects of our manufactured products. The two very big ones. Let’s first talk about our investment in companies called P&C Column A. Oil and gas industry. Now if you’re going to drill for oil or gas anywhere in the world, you need a 20 foot pipe and you need another 20 foot pipe to connect it to an you need a lot of 20 foot pipes. But between every single pipe, there’s a coupling and to have that coupling, it has to have reverse threading.

I don’t want to get too technical this morning, but I will point out to you that we are the company that has that equipment and we do it worldwide. Now I want to point out something else about it. This is not - - the Park-Ohio that some of you remember was an auto supplier in Ohio. This is a global company now. And we talk about manufactured products, we’re talking global. Pakistan, Russia, China. And one thing’s great of our capital equipment, when you’re in the business of making things, you’ve got to remember that the equipment itself is like the razor blade idea. The equipment itself goes up and down in cycles. Three years ago it was weak, it’s strong now, maybe it will get weak a little bit. But every one of our capital goods companies has one feature. It’s called parts and service. And when you take our equipment, it’s oil and gas is going into the hostile environment, or you take our steel equipment that’s going to Ball Steel in China, and go in that factory and see our equipment run 24/7, smoke, oil flying everywhere, I’ll tell you something - - three years later there isn’t anymore equipment. And the great thing about it, they need more equipment. So the equipment burns up and really is punished And what’s great about that is, sooner or later when it wears out, they have to come back to parts and service. So maybe there’s a little lag between when they wear it out and when they buy new ones, but that’s called parts and service, and I’ll tell you something right now, that’s where some real margins are.

So when I look at the company, quite frankly, you might think I’m enthusiastic about it, but realistically, when I look out over the next 5 years anyway, this is a company that’s got 3 solid business, it has management in place, the management has a huge invested interest, I think it’s reflected in how hard we work, and I think for the investors, for all the stakeholders in the company, the employees, the lenders, the shareholders, are out here trying to do a great job and we hope to continue to produce the results that you can all be proud of. I’ll be glad to answer any questions. Thank you.

[OPERATOR INSTRUCTIONS] Our first question is coming from Phillip Volpicelli of CIBC.

Hi, guys. Just two quick questions to start with. If you could go back over the manufactured products margin and the one time items in there. And then also, I think Matt, you mentioned that Dana, your bankruptcy exposure there was $300,000. I think if I remember correctly, Delphi it was a $700,000 charge. What was the total sales to Dura that, what was the exposure there?

Okay, Hi, Philip, how are you? Let me go back over what I said and kind of brush that up, then you can take it from there. What I was trying to do is, year over year there was a reduction in EBIT in manufactured products from 5.2 to 2.9 million. In that 2.9 million there was a $1.4 million restructuring charge associated with prior announced moves. Separately from that, there was approximately a $300,000 charge for the Dana bankruptcy. The total charge for the fourth quarter associated with the Dana bankruptcy was approximately $500,000. In the third quarter, we took a charge for the Delphi bankruptcy of approximately $700,000. So the combined effect, incorporated in our numbers, was $1.2 million for both Delphi and Dana.

Perfect, that’s helpful. And so going forward, as we look at that manufactured products business, we should return back to margins somewhere in the 8 to 10% range? Is that your expectation?

Yeah I don’t want to be specific there. The nature of that business, as Dad had discussed, there is a capital equipment OEM business and a spare parts and service business. Occasionally what we will have that could impact margins is a product mix that leans more towards parts and service which is higher margin or, in this case, a significant revenue shipments in actual capital equipment that could be of a lower margin for that particular time period. So in general, I agree with you. We would view this as a below average margin quarter for manufactured products.

Great. My last question before I pass it on, can you just give us a little more information on ElectroTherm?

I can. There’s not a ton to say about it frankly As you know, we’ve done these kind of bolt on acquisitions where we see something that we can buy at a reasonable value that can be added onto one of our core businesses. This was an induction heating related business that was principally - - well, it had two sides very similar to our business. A parts and service business which fit in perfectly with our business, it also had some very interesting what I’ll call I guess induction heating technology which will be a nice add on to our IP in our capital equipment group. But quite frankly, not a ton to say about it because it was so small. I couldn’t begin to give you any estimates or anything like that. It was just kind of small bolt on.

Gotcha. Thanks, guys.

Thank you. Our next question is coming from Richard Paggett of Morgan Joseph.

Good morning, everyone, and Happy St. Patrick’s Day as well. Wanted to get back to ILS margins. They were obviously doing very well, a bit higher than we were looking for, especially considering you had the PPG acquisition on there which I think you guys have said in the past has had lower margins. I mean, is this level something that we should look for going forward, or is this particular quarter it was just a nice bump and directionally it’s good, but this isn’t the new benchmark?

Well, let me answer the first part first. This is Matt speaking. We would, clearly we anticipated the additional margin expansion there. You’re right, the PPG business was a lower margin. As we executed our strategy of rationalizing bad business there, and implementing new pricing strategies, that business, albeit may have become a little smaller as we talked about, but certainly became a better margin business, particularly at the EBIT margin line. So I think what you’re just seeing is the execution of that strategy. Clearly, what is critical to our continuing margin enhancement is the latter of the three points I talked about which is our growth. We should, and I’m unfortunately not going to answer your question specifically, but what I’m going to tell you is, as we grow and see more throughput through our fixed cost overhead, which is pretty small, most of the investment here is working capital, we’re going to continue to see an enhanced EBIT margin. So I don’t think that what you saw there was unexpected and I think that our goal is to continue to certainly accelerate that.

Okay, I mean, I guess given those comments then, and you said you won’t get specific, but let’s say if we can do north of 7% in ILS, that guidance that you guys have given seems a little low in my opinion.

That’s why we call it guidance.

That was Eddie speaking, as you might imagine.

Okay, and I guess talking about pricing in ILS, why don’t we move over to manufactured products. How’s pricing in that? I mean, it seems if you guys have the exposure to oil and gas, you should be able to kind of name your price on essential equipment like that.

Yeah, the capacity in most of our manufactured products businesses is very tight. So we are in a very positive pricing environment, there’s no question.

Okay, and then your guidance range, what kind of raw materials or energy assumptions are you guys making? It doesn’t have to be exact numbers. It may be directionally whether it’s current levels or higher, lower as the year goes on.

Our guidance looks at raw material prices resembling 2005. In some cases, we’re looking at slight increases but better pass-through. There’s no major up or down adjustment associated with changes in raw material.

Okay. And then with the Dana bankruptcy, I think you guys said there’s about another .4 million in the first quarter?

That’s correct.

And that will be it?

That’s it as far as we know at this point. Yes. There’s no reason to believe there’d be anymore.

Okay. And then on the aluminum revenues comments, I know you said that there might be some pressure in the first half of ’06. Are you talking in terms of year over year trends in terms of it going down at a similar pace? Or we should look at the current run rate as maybe the level that it will be going forward?

Yeah, I think the point was is that what we have seen from a trend perspective in the fourth quarter is not dissimilar to what we expect to see in the first half of 2006. I think that as 2006 moves forward, there is an opportunity in the first half, but the opportunity for an up tick is more heavily weighted towards the second half of the year. But I certainly believe that ’04 was sort of the, once again, to use the word kind of bottoming out of what we could have seen.

Okay, excellent. Thanks a lot.

Our next question is coming from Steven Carpel of Credit Suisse.

Actually it’s Tom Clamka. Can you talk about - - I’m not sure what your heavy duty truck exposure is now company wide and at ILS and how are you guys positioned for a likely downturn in 2007?

This is Ed speaking. Of the total truck position we have, let’s first break it down into two categories. You have the Class 8 and you have the other, I mean like the post trucks. So - - and when you’re talking about trucking, you’re not talking about all the trucking. I think what you’re going to see here and what everyone is expecting in ’07 sometime is a rundown in the number of builds of the Class 8s. Now we have had a pretty aggressive strategy with these major accounts to broaden the number of pieces we ship to them. And I don’t know the exact number today, but the family of parts is the issue here We’ve done a very good job of expanding the number of pieces that we get on the truck. So when there is a downside, it will not be as dramatic as it was once before if you want to go back to the last cycle. So instead of just having 10 items on the truck, we’re trying to move to 20, 25 items.

There will be a downside, there’s no question about that. I don’t think we’ll measure. I believe that everyone anticipates this to be in ’07 at some point. But I just came back from the sales meeting of ILS. There were 125 individuals there and I have a commitment from them that they’re going to fill that hole, whatever that hole is, between now and the first quarter of next year. So this team has been very good at producing results and quite frankly, I believe that what we will lose in heavy trucking, that portion of that 60% that we don’t catch by increasing the family of population, we’ll fill it with others. So I don’t think that will dramatically affect us. Are we excited about it? No, but it’s been good to us short term. We’ll manage our way through it. We’re all over it. We’ve been all over it for a year. We see it coming and we will be prepared.

In your past presentations and all, I think you classify heavy truck as something like 10 or 11% of the business, roughly $100 million, I guess. Is that all Class 8?

No, it’s all not Class 8. As I said, that business is 60/40. Just take that numbers roughly, 60% is 8 and the rest is post office trucks and all the above.

Okay. And then how quickly is sort of your content expanding? I guess they’re looking at something like a 30 to 40% decline. Some of that could be offset by expanding your content per truck, but is that something that’s ramping up pretty quickly or - - I would guess you’d still have to set yourself up in ILS to expect a pretty significant downturn. Your existing content today, regardless of how large it is, is still going to follow the truck though, correct?

Well, let’s look - - that 60% of that number is the number that has to be filled. Is it $30 million that has to be filled? It isn’t all 60, okay? So the answer is, it’s not a cliff. When you talk about a $550 million business, $30 million is not a cliff in this business anymore. Okay? So let’s assume half that business kind of disappears. Now you’ve got to fill 30. Well, 30 out of a population of 550 with the type of team we have is not a big thing. I think I tried to make it as clear as I could. This is an expanding business. We can expand it again based on the ROI or 25% on invested capital, there’s something strange in this company to how fast we can grow. Because sales and selling this idea is not a problem. So if we lose it, sure, there’s going to be a dislocation for a period of time, maybe a quarter, 4 months. But we’re well prepared for this. We’re building as hard as we can to fill that hole.

And another thing that’s interesting about that is a fellow said to me a couple days ago, Ed, if the trucking starts down and 60% of 60%, based on your model, you’re going to get all that inventory and all the receivable and all that cash back. What are you going to do with it? Keep in mind, this is a business and as soon as it slows down, throws nothing but cash at you So the good news, it slows down. The good news, it throws cash. And we pay down the bank debt and that will make someone else happy. That result is we’re all over this. This is not a company that waits for bad news. Look. It starts raining then it starts to snow, then it sleets. As soon as it starts drizzling, we’re all over it. So I think we’ll handle it well. We’ve got a good plan and but you know something? It’s going to happen. We don’t know when it’s going to happen, it’s going to happen. We’ve got a hole there and we’ll fill it.

Okay, well I’m going to ask you this while it’s still sunny skies out. Looking to ’06, you should be generating a decent amount of cash out of business. Where do you see, how do you balance debt reduction versus acquisitions? What’s your plan sort of going forward, especially given that ’07 may be a little bit bumpy?

Well, listen, that will take the cash out. Let me tell you about acquisitions, how we feel about it. Are we acquisitive? The acquisitions that we’ve made recently, if you want to call them, have been very low ticket items, tremendous coverage on assets, so it’s not been with a great deal of risk. It’s been directly in businesses that we are currently in. So if there is a strategy here about acquisitions, we’ve got the 3 companies we already have to grow this business as far as the eye can see. But when we get something that adds on like a PPG or ElectroTherm, those small dollar numbers that add on that we think has a great return, and we’re talking about a three year, I mean it’s like, if it’s not like a 3 year payout, we wouldn’t even do it. So it’s a pretty interesting model we have here. So we’re not acquisitive and we’re not going to call, you’re not going to hear tomorrow that we bought a hotel chain. Matt?

Yeah, I would just emphasize that deleveraging - - people are probably getting tired of hearing me say this, but that was the significant effort of 2005 which we were able to achieve more through growth in earnings than through a reduction in debt. 2006, due to the amount of investment that was made in cap ex and working capital in ’05, would appear to be a much better year to be able to deleverage not only through a nice increase in earnings, but also through a decrease in debt. So that is a principal goal of ’06 and we will not only use free cash flow to do that as a priority over acquisition, but we will also look for opportunities to use sale of assets equity, anything that we can do to continue to move towards our goal of a deleveraged company.

Okay, thank you.

Thank you. Our next question is coming from Robbie Knaus of AIG

Yeah, just wanted to walk through sort of the free cash flow outlook for 2006. If you could talk about cash access, working capital usage, cap ex and interest?

I think, Robbie, we’re not prepared to give cash flow guidance, if you will. But I think I would emphasize that we think we made significant working capital and capital expenditure investments in ’05 for ’06. You also I think heard clearly in Rich’s presentation that we do not expect to be a payor of federal income taxes. So I think that can give you a sense of a range of opportunity on the free cash flow front.

Have you given any guidance on cap ex?

We have not.

All right. Thank you

Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad.

Well, thank you ladies and gentlemen. Look forward to seeing you after a successful first quarter.

Thank you.

And a belated Happy St. Patrick’s Day.

Thank you. This does conclude today’s Park-Ohio Holdings conference call. You may disconnect your lines and have a wonderful day.