Park Ohio Holdings Corp (PKOH) 2006 Q1 法說會逐字稿

Good morning and welcome to the Park-Ohio first quarter 2006 results conference call. [OPERATOR INSTRUCTIONS] Before the conference call begins, please remember that the Company will be discussing some sessions 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 their earnings press release, as well as in the Company's 2005 10(K) filed with the SEC on March 16, 2006. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, the Company may discuss EBITDA. EBITDA is a not a measure of performance under generally accepted accounting principles and is considered a non-GAAP financial measure as defined by the SEC. The Company may present EBITDA because management believes that EBITDA could be useful to investor 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 a reconciliation from income before income taxes to EBITDA, please refer to the Company's current report Form on 8(K) furnished to the SEC on May 5, 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. Welcome to the Park-Ohio's first quarter 2006 conference call. I introduce Matthew Crawford, COO and President of the Company.

Thank you very much and thank you for joining us. We are pleased to announce another solid quarter of both revenue and earnings growth during the first quarter of 2006. Revenue was up 14% to $260 million. Earnings per share on a tax adjusted basis were up 11% to $0.42 per share. And EBITDA increased 12.4% to 20.2 million.

Looking at ILS specifically, the first quarter of 2006 was particularly strong. Revenue growth exceeded 18% to a total of 150 million. ILS's continued growth, up over 8.5% since the fourth quarter of 2005, is continued validation of our strategy of diversification, deeper health penetration and very aggressive selling. New account activity set record levels during the first quarter of '06 with additional $20 million worth of new business booked. Names like Whirlpool and Flexell are particularly exciting because they represent deeper penetration into the appliance and furniture areas.

We will continue to focus on revenue growth as we successfully develop our supply chain management concept and continue to give our customers a significant competitive advantage by substantially reducing their total cost of purchase. ILS earnings also accelerated with a 27% growth. Equally important, is the increase in EBIT margin from 6.5% to 6.9%. This increase is largely representative of our increased volume and also our sourcing strategies, which are particularly important during this period of global capacity constraint.

Turning now to our casting unit, revenues were flat during the first quarter of 2006. There is really not a great deal to say at this juncture, other than that we are in a holding pattern waiting for some of the new business that we've talked about on prior conference calls, which we anticipate to come on line late this year. We continue to be actively quoting new business. And we are confident that we are in a position to provide the lowest cost high quality casting in the industry.

With first quarter capacity being at approximately 70%, we are very optimistic about the next 12 to 18 months. Aluminum, casting EBIT margins fell by approximately $400,000 during the quarter, which was largely due to the increased utility costs and some expenses which are related to the ramp up for new business expected prior to year end. Manufactured products was up strongly by 14%, due to revenue growth in all of the individual businesses.

Our capital equipment group continues to benefit from strong international demand in heating and melting equipment, as well as oil and gas drilling equipment. We also are seeing interest in several new product designs, which in one case is helping Volkswagon in their European operations meet their auto exhaust emissions goals for the diesel engine. Revenue was also up strongly at our rubber group, reflecting new business from our Japanese auto tier one accounts. And our forged products, where we are seeing strong sales of both rail and aerospace customers. In spite of strong sales, EBIT margin was down 2.6%, due largely to a $1 million loss at the rubber business during the first quarter.

This loss was mostly related to customer and inventory issues. And needless to say, without this hit, the first quarter not only for manufactured products but actually for all of Park-Ohio, would have been somewhat higher. Borrowing for the first quarter was up approximately 22 million from year end. The increase in average outstanding borrowings, plus the increase in LIBOR during the past 12 months, caused our interest expense to go up by approximately $900,000.

We anticipate some relief in this area from the recent reduction by 50 basis points of our bank borrowings -- of we actually just recently just changed the terms of our current bank to reduce our borrowing rate by approximately 50 basis points. The 22 million worth of increased borrowing helps finance 6.5 million in CapEx and some small actual business purchases, and a 17% increase in non-cash working capital from year end. The increase in working capital is normal, as we prepare for a seasonally strong second quarter. Also having inventories in our capital equipment group as we anticipate from large shipments early in the second quarter and also as we've already spoken about, new on line business coming on at the casting business and also at ILS.

In spite of the increase in borrowing capacity, the Company still has approximately $38 million in unused borrowing capacity. Our guidance for 2006 CapEx is 16 million and we still anticipate a reduction in debt for the year 2006. I would point out our 2006 cash flow will continue to benefit from our net operating loss carry-forward, which means that we are still not paying any Federal income taxes. With that, I will turn the call over to our Chairman and CEO, Ed Crawford. Thank you.

Good morning, ladies and gentlemen and gentlemen. I think Matt has covered some of the most important points. Let me give a quick review on the operations. Again, ILS is performing on plan, terrific performance, up 19% in revenues in the first quarter. It continues to write new business, broaden its base of world class accounts.

We believe that all indications are the trucking -- long awaited or anticipated trucking slow down has not impacted our Company at this juncture. Our strategy, has always been to add more products to each particular product line or trucking line. When you think of class A, which is a part of the business, not all of it, it's clear that some time in '07, it appears to be a second, third quarter event, triggered by these emission changes and so forth will affect the trucking industry's and directly affect ILS's revenue. However, we have a very serious plan in place. And we anticipate being able to garner new business, as Matthew indicated, to more than underpin any contracted shortfall in volume in the trucking business in '07.

That is very solid, ILS continues to be a Company we can count on to grow internally with bigger participation. And more important, again, the model is working, customers are being added. So, the future of ILS looks very, very bright. Aluminum, we talked about aluminum. We've anticipated and it's pretty much on schedule. We are actually happy here at the Company to have been able to maintain the revenue flat year over year in a -- as advertised, a restructuring point in the Company

This Company will get stronger. New business is in place, starting in, particularly in, the fourth quarter, starting. But this Company will be a performer in '07. It's a part of the auto components industry, Detroit auto components industry. And we work very hard to convince people this is a global Company here, an international global Company and not a Cleveland based, Detroit auto supplier. But clearly, in this case we are. And our strategy is increasing our penetration of the transplants, to use that word, continues to be a top priority. We are broadening the business. We will be selling all the auto industries.

I personally believe there will still be cars made in America, they'll be sold in America. And maybe that 1 million jobs that were lost, displaced from Detroit just went into the south. So, we are pretty excited about it. We are going to maintain our position of being a low cost supplier of quality product. So I am optimistic and continue to be optimistic about the general opportunity to grow. Particularly now when we are deploying the assets from the Amcast transaction, enabling us to grow without having a lot of CapEx.

We feel good about aluminum. Manufactured products, up 14%. This is again, where we really have our global footprint, particularly in the gas and the oil and energy area where we are doing very, very well. We've got nice visibility here. We see this Company strong for the next couple of years. But good management, solid across the board. So, from the revenue standpoint we are going in the right direction. Aluminum will come along.

So when I kind of recap, the first quarter pretty much on plan. You can see that we have confirmed our guidance, that we feel that what we have out there for '06 is real. Hopefully we will have an opportunity to improve on that but we are working hard here. The Company is in a pretty solid position. Our cash flow, we are using working capital because the Company is just bigger and growing. But we believe that we can return -- our goal it to return at the end of the year as we borrow out less dollars than we had the previous year. So if we can accomplish that and turn in the numbers in governance, we are not saying that '06 is in the stable yet but it is clearly something we are confident we are really beginning now to meet.

Looking down the road here a little bit , preparing, here we think of downsize. So, we are already talking about what can happen, the economy has been hot for some period of time. Sooner or later there will be a slow down. We are already starting to think about where it might happen. But if you look at our annual cover, and hopefully you've received a copy of it, it shows a nice picture way three for one. Talking about three companies within one corporation.

So diversification of supply chain management, to world class accounts, aluminum products, solid investment there and manufactured products; continue to be the model that we like, are convinced that we can continue to grow these businesses and are optimistic about the future of the Company. So at this particular juncture, we are prepared to answer questions. Thank you for listening to our comments.

[OPERATOR INSTRUCTIONS]. Our first quarter comes from Philip Volpicelli of CIBC.

Good quarter, guys. Just looking at the working capital and the increase in borrowings, I was trying to reconcile some of the numbers, Matt, you mentioned that you had some 0.5 in CapEx and then you made some acquisitions. Could you give us the total of the acquisitions? And it looks like working capital is up about 40, yet your borrowings were only up about 22. So maybe if we got a little bit more color on the large amount of capital equipment shipments that are going to be going out in the second quarter that might help us reconcile some of that.

Philip, hi, it's Matt. I will jump in on the first point and I'll turn it over to Rich on the second point. The acquisitions, there really were no significant acquisitions. I was just pointing out that buried in some of those -- in some of that CapEx numbers were acquisitions of small businesses, which we more or less view as balance sheet acquisitions where we added some accounts receivable, added some inventory, kind of a small balance sheet deal, as opposed to an acquisition in the way that you're thinking about it. Sim I don't think it would be fair to break those out because it wouldn't be consistent with the way you or I would think about an acquisition. Rich, you want to comment on the second piece?

Sure, hi, Philip. Yes, if you look at the working capital change, receivables was up about 27 million, which was directly in line with the increase in sales if you look at February, March, compared to November, December. No change in days there. Inventory was up about 30 million, which is again as we discussed, seasonal growth plus some really new business that we are building up more quickly than the logistics business, as well as the for the sales in the capital equipment lines. The reason that it didn't flow through as is as large an increase in working capital -- or an increase in borrowings, is because we managed carefully through all this time. Kept the days very straight in the first quarter. And therefore, a lot of the inventory build was offset by payables.

Okay. Great. And then as do you look ahead into the end of '06 into '07, it sounds like we've had a couple of good quarters here. And obviously class A. trucks, it's going to change to the dynamics a little bit in 2007. It's obviously not a huge part of your business but it will affect you. In the past, you've considered doing a secondary equity offering with your stock, at about $20 per share. Could you give us your thoughts on that?

So, it's Matt, again, I will hop in. The goal that we have here for 2006 is to continue to deleverage this business. So certainly, foremost in our mind is the opportunity to be able to issue equity and we will continue to look very, very closely at that option.

And then I think, Ed, you mentioned that your debt levels at the end of the year would be less than where you began the year, is that accurate, did I hear that correctly?

Yes, correct.

Okay. Thanks, guys. I'll let somebody else ask some questions.

Thank you. Our next question comes from Richard Paget of Morgan Joseph.

Hi, everybody. Looking at the aluminum segment, has business, has it kind of reached a bottom given that you were flat year over year or do you think there still could be some down side to the year over year comparisons?

At this juncture, I believe our goal is and has been from the very beginning to match '06 and the '05. I still believe there is an opportunity -- an ability to anticipate the auto industry, quite frankly. Even across the broad spectrum that we are facing it, is just kind of a crap-shoot. For me to sit here and say I understand what's going to happen in the third and fourth quarters of the auto industry, I have absolutely no idea. We do business with a lot of customers, a lot of companies. And it's a visibility. And can we do it? Yes, that's our goal. It's imbedded in our guidance.

Quite frankly, I don't like to comment on things that are totally out of our control. And right now when you look at the auto industry, you see some soft spots. But quite frankly, first quarter is down. We are just going to keep on working hard to maintain the current levels. But if we can bring our perspective business on in the fourth quarter as planned, anything we might give up to plan in the third quarter, in my opinion, we will get back in the fourth quarters.

The programs we are in the process of launching on Friday, are all on schedule. So, things look good because we will get some revenue spark from that in the fourth quarter. That's the goal. There's really not much visibility, only what we are doing in our new business and when it's coming. And I can't really comment just speculatively on what would happen in the third quarter in the industry. I think -- quite frankly, personally, I think you could have, instead of two weeks shut-down, you could have three in some auto industries and four others. But I think we will get it back in the fourth quarter.

Could you talk a little bit more about in the manufactured product unit, that $1 million loss, what exactly was that related to?

Well, it's related to our -- I will have Rich comment on it technically. It's one units in our Park-Ohio products, it's a rubber unit. Everyone that's been around a long time knows this has been one that continually being one of our underperforming segments or companies within the unit. We do not want to get into too much individually because we talk about the total unit. But it's something in which it's very, very heavily skewed to auto. The largest account is a big account in Warren, Ohio, and we've got some business. But one thing nice about the rubber business that we've had, we have -- again our strategy across the rubber platform -- auto platforms is to increase our business through a broader base of customers, which we've been able to accomplish.

We've done a nice job of adding a lot of the transplants to our rubber format. It's not a big unit in sales but it's all about inventories and related items to customers coming and going. And our willingness to clean house when we don't have something that we don't believe is going to get sold and so we just, when in doubt, we take the hit. But I think everything that was there is pretty well behind us. Rich?

Yes, Richard, there's not a whole lot to add to what Ed said. He's covered the ground pretty well. We've had a tremendous growth in that business over the last three or four quarters. There was a dip in the middle of 2005 and then there's been significant growth since then addressing some of the growth related issues, as well as just making sure that any customer issues are completely cleaned up. We took our lumps in the first quarter and we are moving ahead.

I remember on the last conference call you guys said there still may be some residual Dana write-downs. Any of that left over in the first quarter?

We're going to address certain accounts. I think you are referring to the point that we said we had about $400,000 more of the Dana hit that was already known and it would be hitting in the first quarter?

Right.

And that's correct. That did hit and it flowed through as we projected.

All right and then finally, in the ILS if you could give us a sense what percent of that nice double digit growth was organic versus from the acquisition of PPG?

Yes, Matt again. I would say roughly 50/50. It's a difficult analysis at this juncture because now that we've owned that business for such a long time and merged some of the ongoing operations into individual warehouses, taken a lot of the costs out, it's very hard to get to that number. But for lack of a better metric I would say 50/50.

And then within that organic growth, is there one thing whether it's price or penetration or new business, that is hitting better than the other one?

In terms of what?

The organic growth.

You are looking for industries or you're looking for customers, what are you looking for?

Well just in general, with your customer base, is it your pricing is particularly strong or is it penetration that's doing better than -- or is it just straight up new business?

I think all of the above. We are -- in the space that we play in, we are providing a more competitive, more value proposition for our customers to outsource what we do. And so, we are priced competitively. We've got aggressive new sales activity going on. And I think you hit on all three items that are going on.

Thank you. Our next question comes from Arthur Winston of Pilot Advisors.

I was wondering if you have any underperforming businesses that you might, I assume you've sold businesses in the past, contemplate selling to reduce debt?

We still have a few, what we would term as non-core businesses, going forward. The positive thing is that they are all doing very well. And there's a view here that when you have companies that we have low investments, which have very high EBIT's and they are industrial based Company's, we have tried and continue to try and if anybody calls us and asks us if we are willing to sell X or Y, we respond and say, yes. And there have been discussions with people regarding some of our units that we would be clear, we'd be anxious or interested in disposing of. But in reality, there hasn't been any fair pricing out there relative to people buying an industrial concern of X number of dollars in sales and paying a fair EBIT, which would have to be close to 6 to make sense to it.

Needless to say, these are niche businesses. They are profitable, run by good people, we've had for a long time. And when I think in terms of the cash flow, the free cash flow after taxes and interest and COGS and everything else, they are pretty supportive to the overall picture. And if we can sell any of them at a fair price, we'll be more than happy to. We entertain it at all times and there's always one discussion going on here or another about these businesses that we think are very strong, profitable businesses, we've held for awhile. And we just hope that we will find buyers and we have sold and will sell everything other than the three key businesses that we are committed to.

You would think with all the private equity money around someone would step up and pay a fair price. So basically, then, you really don't have any means to reduce your debt other than selling equity, it doesn't seem like, which might be a good thing to sell equity?

This is Matt jumping in. I think two comments. One is, we anticipate, as I mentioned before, 2006 to be an excellent free cash flow year. So clearly, we believe on the scale of our business, we can generate significant cash flow to be able to not only deleverage the Company but to do it fairly rapidly. I would also point out that the sale of businesses, the question you asked, is a little bit different than the sale of assets. We view around our business constantly look for opportunities to sell individual assets. We have some real properties that we have on the market right now. We have some assets that we're not fully utilizing that are for sale. So I think that there are opportunities to do some small asset sales, which will help to deleverage this business outside of the outright sale of one of our ongoing units.

I surely don't want a prediction and you couldn't give me anyway. But with $365 million of outstanding debt, which I guess will come down towards the ends of the year for the reasons you've alluded to, why you have to build up the working capital in the first quarter. But nevertheless could enough free cash be generated over two or three years to make a dent in it?

Well, obviously our business, we've given a forecast of over, I think, 1 billion plus in revenue. Yes, I do believe that we can make significant progress, yes.

Thank you very much.

Thank you. Our next question comes from Lawrence [Jolan] of Lehman Brothers.

Good morning, it's Lawrence on behalf of Sarah. I just wanted to follow up on the working capital and the free cash flow use in the quarter. Your response to Philip's question was very helpful. But could you guys give us the specific operating cash flow number for the quarter? We typically define free cash flow after CapEx but if you could maybe give us the operating cash?

Yes, the net cash used by operating activities for the first quarter will be $20.1 million.

And that $6.5 million CapEx number that Matt referenced, that's pure CapEx?

No, that's a combination of -- it will show up in the cash flow statement as a combination of CapEx and small acquisition.

Okay. But the majority of it is CapEx?

The Q. will be coming out in a little bit, we might as well just throw it out. The purchases of property, plant and equipment are 3.4 million, and 3.2 million of acquisition net of cash acquired.

Great. And then following up on I believe it was Matt's comment regarding you expect to have an excellent year from a cash flow perspective. I don't believe you guys have given guidance in the past. Would you be be comfortable guiding to some sort of number on the free cash flow side, whether it's double-digit or some other number?

I think what we are prepared to do is what we did a little earlier in the conference call, which is say we anticipate ending the year with bank debt reduced from the beginning of the year.

Thanks very much.

Thank you. Our next question comes from John Baum, a shareholder.

Hi, guys, great quarter. Quickly, most of the questions have been answered. Are we still -- for cash taxes this year, Richard, are we 10% to 15% , what kind of number can we look for that for state, local and foreign?

Typically, we should run around 11%, pretty comparable to last year.

Also on the same issue for Federal taxes, are we looking late '07 right now, given how you are coming or is it mid '07, late '07, what are you projecting right now?

Right now our best estimate is that we will be completely sheltered from Federal cash taxes through the end of 2007 and possibly into the beginning of 2008. Predictions are difficult enough. But who knows, maybe we will end up paying something late in 2007 but that's our best estimate right now.

Let's see. We covered the unit charge already, that was already baked in. Let's say, the 50 basis points reduction on the bank debt, is that on the revolver and is that going from LIBOR to prime, prime to LIBOR and will we see that reduction the second quarter?

We will see it the second quarter. It's effective April 1. It's on the LIBOR based piece, which is obviously the lion's share. Basically across the breadth of the different brackets that we can end up in, we've taken 50 basis points off the surcharge on top of LIBOR.

Okay. And a question overall on the seasonality of the business. With a little bit of growth projected in the fourth quarter, are we going to see a little less seasonality? Typically, you guys say that the business is softer in the third and fourth quarter than it is in the first and second, due to vacation schedules and holidays in the fourth quarter. But with aluminum products maybe ticking a little bit more in the second half of the year, with ILS becoming a great share of the overall revenue, is it fair to say that it's a little less seasonal now?

John, hi, it's Matt. Yes, I would agree with your comments. We have become less seasonal. As we commented just a short time ago, the Achilles heal tends to be the third quarter because of summer shutdowns. But in general I agree with you, we are seeing less seasonality than we have in the past.

Hi, this is Ed. As ILS gross, that takes the seasonality out of the Company over a long period of time. It's just a broader base of customers that exist in all of ILS versus aluminum or manufactured products. So from a tiered viewpoint, my opinion is that the diversification over a broader base of industries will affect it long term.

Okay. One final one I just thought about. The oil and gas tubular stuff, is that still looking strong? You've seen some anecdotal commentary. Maybe going out '07, are you guys still forecasting strong growth in oil and gas metal supply?

John, hi, it's Matt again. Absolutely, the lead times on that kind of equipment is over a year right now for us. We clearly, anticipate continued strength because at the price of oil, they are anticipating continuing to build product. Once again, not only for all the mills that have been buying our product over the years, but for continued infrastructure capacity growth in Russia, in China and in other parts of the world that are just getting into this business. So, no, I see it as more than just our old customers ordering more. I see it as a more comprehensive growth strategy that I think is going to last, boy, at this point it's hard to tell, but for a number of years.

John, this is Ed again. Another interesting, we always talk about the tail of these capital goods, the parts and services. The longer we get into the cycle, the equipment that we sold two or three years ago, at the beginning of four years, at the end of the cycle is almost used equipment by now. So, you are going to see not only we will continue to sell equipment but you're at a crossover where the parts and service will hopefully start to build in anticipation of breakdowns or equipment wearing out. Because as common as -- this equipment normally goes into what I call hostile atmospheres.

Thanks. That's all I have.

Our final question is a follow-up coming from Arthur Winston of Pilot Advisors.

If in fact ILS is as much of a jewel as it seems to be and we think it is and our stock is really too cheap. Given that it's a jewel, to sell new stock at this price with a $100 per share in sales and a 3% margin would earn $3 a share. Why can't we do something creative like split off ILS into a separate Company? Sort of maybe raise equity when the stock gets it's real value, which would be very high and use that to service some of the other debt? Or do something creative so we don't have all this debt around and realize the value in our Company? Because ILS would probably sell more than all of the Park-Ohio would sell for if it was a separate Company.

Art, this is Matt again. We are keeping aware of the topics you are raising. And if you have other thoughts around our strategy, we would be glad to talk about it offline.

Okay. Fine. But I don't know any more than you do. You know the value better than me. But I understand, that's very good.

We are constantly looking at all of our alternatives and are trying to do the best we can.

Thank you.

Well, thank you ladies and gentlemen. We appreciate it and look forward to getting together after our second quarter. We are optimistic and thank you for your continued support. Good day.

Thank you. This does conclude today's conference call. You may disconnect your lines. Have a great day.