Park Ohio Holdings Corp (PKOH) 2006 Q4 法說會逐字稿

Good morning, and welcome to the Park-Ohio 2006 year-end results conference call. (OPERATOR INSTRUCTIONS). 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 the future results or events, there are a variety of factors that may materially change their results from those projected. A list of relevant factors may be found in the earnings press release, as well as in the Company's 2006 10-K, to be filed with the SEC by March 16, 2007. The Company undertakes no obligation to update any forward-looking statement, whether a result of new information, future events, or otherwise.

Additionally, the Company may discuss EBITDA. EBITDA is not a measure of performance under generally accepted accounting 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 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 8, 2007.

(OPERATOR INSTRUCTIONS). Now, the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer. Sir, you may begin.

Welcome ladies and gentlemen to the spring conference call of Park-Ohio Holdings. We'll be reviewing our 2006 results and taking a peek at our 2007 earnings guidance. May I introduce the President and COO of the Company, Matthew Crawford.

Thank you very much, and thank you for joining our fourth-quarter or year-end 2006 conference call. We're very proud of our record revenue and operating profit during the year '06.

Earnings specifically to those numbers, revenue on a consolidated basis was up 13.2%, or $123 million to 1,000,000,056. EBITDA increased 9.2% to just above 80 million. Earnings per share on a tax-adjusted basis increased 2% to $1.68 from $1.62.

Our earnings reflected a strong finish, which included strength across most all of our businesses and end markets. Specifically, we continue to benefit sizably from our strategic growth in non-U.S.-based sales, and have seen solid expansion in Asia, Eastern Europe and Russia.

We're also pleased with the continued success of ILS and the increasing revenue opportunities it has based on the ongoing customer effort in joining our supply chain model. Talking specifically about ILS, it grew 12.3% during 2006 year-over-year to slightly under $600 million. This growth was fueled partially by the acquisition of NABS late in the year, and partially by internal growth from new customers and growing demand for our services by current customers.

As we discussed throughout the year, our sales force reorganization during 2006 added substantial new orders, which began in the second half of '06 and will continue to build up into revenue during 2007 as these programs are actually implemented. Although we're concerned about the significant reduced demand in the heavy-duty truck industry during 2007 and especially in the first half, we're optimistic that the robust demand for supply chain management services and the substantial -- the substantial diversification of our customer base will more than offset this temporary adjustment.

EBIT grew by 10.3% during 2006 to 38.4 million. These earnings represented flat margins year-over-year. Perhaps more importantly, we saw a slight increase in EBIT margins sequentially from the third to the fourth quarter.

Going to the Aluminum Products segment, revenue went backwards about 3% to 155 million for 2006. As we discussed on prior calls, we're been enduring the perfect storm of an extremely weak end market in auto, combined with costs associated with what we're calling a contract gap as well as prep costs associated with the new business coming online. What I mean by a contract gap is we have the expenses of keeping a couple of plants fully ready for new, sizable contracts we've estimated in the range of $60 million on an annual basis. And yet, it's just coming online now.

The good news is that it appears we found a bottom during the third and the fourth quarter. We actually saw a slight increase in revenue sequentially, and will now benefit from the new programs, which have kicked off specifically at the Wapakoneta plant. Although we anticipate Aluminum Products will continue to operate in a difficult economic environment, our belief that we're competitively advantaged due to our lower costs continues to be validated by the strong quoting activity in recent contract wins.

EBIT dropped 57% to approximately 4 million for 2007. Fourth-quarter earnings were similar to third quarter with slight losses as we await the impact of the new contracts. We expect Aluminum Products will be an important part of our 2007 forecasted earnings growth.

Manufactured Products segment, revenue during the period increased 25.8% to 303 million. As we've discussed often throughout 2006, every business unit in this segment showed solid growth. Although each of the businesses are worthy of mention, two of them jump out for their especially good success. First, our capital equipment products, specifically, the threading group for oil and gas drilling and second, our forging operations focusing on aerospace and rail end markets. Because of the strong demand, backlogs and long lead-times in these companies, we're confident that 2007 should also be a strong year.

EBIT increased significantly by 41% to 29 million. This segment continues to benefit from higher margins associated with the proprietary product designs, which are seeing high demand globally in our capital equipment group, as well as continued growth of our particularly good service and spare parts business. Growing the spare parts and business has been a cornerstone of our growth strategy, and we continue to see excellent progress in Western Europe and China especially.

As we've talked in the past, our small rubber business has continued to be a drag on earnings. But we're starting to see -- we're starting to see now things are getting better. And this would indicate that the business is improving sharply in '07.

Turning to the balance sheet, debt increased $4.7 million during the fourth quarter of 2007 to $165 million, which was slightly worse than our stated goal. But if you exclude the increase due to the $21 million acquisition of NABS, total debt actually decreased by $16.3 million during 2007. Total debt for the year excluding the cost of NABS was up approximately 7 million, which was in line with our revenue growth of $123 million.

As of end of the year, we had approximately $40 million left on our line of credit. Interest expense was flat with the prior quarter and the fourth quarter versus the third but up about 1.4 million for the year due to higher rates and higher loan balances.

Working capital decreased again during the fourth quarter by 11.7 million, or 5.1%. But the NABS acquisition added about 4.2 million in working capital. CapEx was $14 million approximately for the year.

Turning to our forecasts. As we discussed in the press release, we expect significant earnings growth during 2007 of between 25% and 40%, which equates to $2.10 a share to $2.35 a share. Although we're confident that we will achieve this goal, we want to be clear that we expect moderate EPS in the first quarter with substantial increases for the rest of the year.

There are three principal reasons for this. First, the heavy-duty truck industry will have its worst quarter of the year in the first quarter. And that's still -- albeit shrinking -- an important part of our business. The significant -- number two, the significant improvements in rubber and our casting group will have some impact in the first quarter but will be much greater in the second, third and fourth quarter. And third, our NABS acquisition has some seasonality in its sales due to its focus on IT hardware, which tends to be stronger in the fourth quarter than in the first.

Having said that, we're extremely excited about what is likely to be another record year for Park-Ohio. Lastly, we anticipate the ability to pay down bank debt during 2007 by approximately 25 million.

With that, I'll turn it over to our Chairman and Chief Executive Officer again, Mr. Crawford.

A couple highlights -- [eyelash] when we look back towards 2006/2007 in supporting Matthew's thoughts. We have had a plan, and we're implementing the plan regarding the slowdown, not anticipated. It is in fact, but we've been talking about this for well over a year.

The new business is in place. As we all know in this particular business, there's a lead-time, a lag time in front of the business. You spend revenues and you set up. You have the expenses. You prepare the warehouses and you start shipping. That's anywhere between 90 and 120 days.

So all that effort with the new business will be implementing into the revenue side probably in the latter part of the first quarter. But the plan is being executed, and I'm very confident that we will meet our goals relative to replacement of the trucking business as it goes down. And we're preparing now and starting to talk about how to get ready to prepare for it if it starts back up, which could be an event in the latter part of '07.

A thought -- following thought on NABS, the acquisition we made late in '06, it's exactly, if not better, than we expected. The personnel on a worldwide basis, the customer's reaction being up in India and Romania and other parts of the world really point to our growing success internationally. And this was a great acquisition. The team particularly have been wonderful and the customer and the reaction.

A lot by our domestic customers in the U.S. has been quite unusual. They really understand for the first time that we continue and we will be an international player to supply chain management.

The aluminum, we've been talking about this for a long time. We've talked about investing in it in the last -- in '05 and '06. The investments have been made. The business is on-hand. We're going to have an improvement in earnings of '06 over '07. And we anticipate that even with a very, very slow start in the first quarter. But the Wapakoneta business is on-hand. We're going in the right direction, and I think aluminum will perform in '07 as we anticipate.

A couple brief notes on the capital equipment manufacturing segment. Last year was a long year. We talked an awful lot about our rubber business. We talked about a plan that would be implemented in the third and fourth quarters that would lead to a dramatic turnaround in the fortunes of that particular unit in '07. It has been implemented. It is in place. We expect really the bad news that's been coming out of that unit -- to turn into a simmer, if not into a whimper, and going in the right direction.

New management top to bottom over there, actually a good reception by our customers. We were able to do a lot of things to maintain our current customer base and do things, some at the operating level, that will make a difference going forward.

In closing on '06, it's clearly -- the one thing that we see here at Park-Ohio from the management standpoint is that Park-Ohio has become really a participant and is profiting from our growing worldwide involvement in the economy. So we think we're on the right track here. '07 guidance is an indication that some of the steps we have been taking the last couple of years will pay off. And we should be on sound footing in '07 and beyond.

At this time, we're happy to answer any questions.

(OPERATOR INSTRUCTIONS). Richard Paget, Morgan Joseph.

Looking at your '07 guidance, particularly the EBIT, a bit stronger than I was expecting, so good news there. But kind of in the face of -- I know first quarter might be a little bit rough. But trucks, cars -- what's the strength that you guys are seeing? Is it the new contracts coming up? Is it Manufactured Products doing well? Is it one particular area, or is it more broad-based?

I would answer that question a couple ways. First, I think what we've seen over the last few years is -- if you take out kind of cyclicality over the cycle, our business is less dependent on auto and truck. So I think that the diversification of our customer base allows us to obviously weather storms in particular industries a lot better. That would be my first comment.

But my second comment would be we are, as we've talked about this morning already, benefited from strong global demand for both now in ILS and in the Manufactured Products group. So really, with the exception of Aluminum Products, which is about 100 -- I forget; I think we said about $160 million.

The predominant, the vast majority of our business plays in more of a global marketplace today than it did five years ago or even three years ago. So our ability to diversify both geographically and both -- and away from some of our larger store industries have made -- obviously is problematic when those industries struggle. But it's just a small part of our business. It's a meaningful but not big part of our business.

And then with the NABS acquisition, how have you guys been realizing some cross-selling opportunities? Have some of your existing non-NABS customers been taking on some of their products? And have you been vice versa with some of your new NABS customers been able to sell them other services?

Let me just point out one area, which is a good example of what we would call integrating and cross-selling here. NABS had a very strong position with their customers internationally on labels, labels for their products.

ILS, although much, much larger, had virtually no participation in the label market in North America. The first priority to -- after the acquisition of NABS was to restructure a label group, expand it with two very talented individuals they had on the technical side along with a new sales team.

Our initiative is that we -- and we really believe that we can grow the label business, and the reception by our customers has been very, very exciting. It's a business we believe that can really grow.

And another issue here is -- yes, we've always been -- we're kind of excited that we ended up doing $1 billion of sales. But everything around here is about profitability and so forth. These are the types of businesses we want to go into. We want to get into the label business (indiscernible) diversify and go to higher margin items and really leave some of the nuts and bolts stuff behind.

We think we're not going high tech here, but there's a perfect example of where we were able to take products and the experience they had in the field with world-class customers, and bring that type of technology and experience over onto the ILS platform. Vice versa, we've been able to use our systems and really bring NABS in for the -- into the real world relative to IT.

So it's been a great marriage. Both teams have worked very well. It's been a long time since I've seen an acquired organization put the arms around the acquirer and say, let's go. So it's been great. But there's an example, a real solid example of how that's worked for us.

So is that integration process mostly done at this point?

Yes.

And then a couple quick housekeeping. In the fourth quarter, there was a restructuring credit it looks like of about $809,000. What was that related to?

The net restructuring actually is 9000. If you look at the footnote on the income statement, there was an $800,000 expense in cost of sales and 800,000 -- $809,000 credit in SG&A. It just relates to some of the costs of shutting down one of our fastener plants. But it nets out to essentially nothing. You see the 800,000 on the restructuring line, because the 800,000 and the cost of sales is varied.

And then for next year and going forward, is 37 still a good tax rate or has that changed?

37 is pretty good. There were some reasons this year it was lower. But 36 - 37 is probably a pretty good go forward.

[John Balm].

Excellent year, especially in the face of declining auto sales here in the Detroit area. Boy, I really feel it, so I've got to give you guys credit. I'd imagine you're especially proud of the Aluminum Products section to basically be essentially breakeven right there with a real tough industry right now.

Not only that, what's great about that is we all know the meltdowns happening in that particular segment. But we see a future in this business, and I think all the shareholders and the stakeholders will see that we've made the right decision in staying with it and investing it. This is going to be a very narrow supply base, and it looks good for the future. I can tell you that.

I have -- let's see -- one broad-based question, a couple of housekeeping. First of all, the broad-based question. I know you kind of touched on it. But does the NABS acquisition, especially in India, China and Europe, does that really forecast more of a worldwide footprint right here? Would you care to comment on the growth opportunities right there?

I'd love to. Clearly, one of the opportunities with NABS, and as we indicated when we acquired it, we were pretty excited because we had exposure to some of those markets. But the NABS team really, really upped the management quality in those areas. We really brought some people that understood how to do business there and have been doing business for a number of years.

Their focus is in the IT hardware space. The reason that is, is not only for the low-cost countries they do business in, but also because in those products they tend to be like -- they tend to like to manufacture and assemble closer to their end markets because they have to get to market quickly.

We're seeing that happen in some of our core industries as well, where it's beginning to not just be about low cost. It's being about getting closer to your marketplace, so absolutely.

A, the quality of management we got with NABS; and B, I think the indications from our customer base that they're growing and consolidating, expanding overseas. And what they would like to see which benefits supply chain management services is a consolidated supplier who can take responsibility for these issues globally, and allow them that if they decide to build 1000 units in Mexico instead of India or in India, they want to have this be a non-issue to them. So this is a trend for our large multinational customers, which really dominate our customer lists.

(multiple speakers) also think is very interesting. When this team arrived, we got them consolidated for the first time, all 36 of them here in Cleveland for the -- get together for the launch or the combination of the two companies. It was amazing to find out the -- of that group, the average age was about 33 - 34 years old.

These are all sales-type, marketing people from their own countries -- from India, from Romania, from China, from Brazil. And they're going to drive this business from the marketing and the business development. And what they needed was the structure and the IT that existed here in North America.

So this is a powerful, powerful group of young people that have a lot of confidence in themselves and really know the international markets. It's really hard to take some of them from Cleveland, Ohio and put him in India or put him in Romania or put him in China and be successful.

So this was well thought-out, and it's been well executed. They brought a lot to the table, and we gave them plenty of structure. They needed to grow.

On that particular issue, it does stand to reason, I think you said China supply chain management somewhere in the 1950s. Is this -- was the NABS acquisition and their existing footprint, is this going to be, again, an easier way to crack those two markets? And plus, will there be any capital expenditures necessary to exploit those markets?

One thing great about the supply chain management business, you don't hear much about Dow over there. This all about systems they call Oscar, and our proprietary software systems allow them to do this worldwide business.

We are -- one of the very important initiatives here has been this development in China. We're now been invited by the central government into a -- in essence the Detroit of China, where they have the auto companies as well as the trucking companies.

And all the Caterpillar/John Deere competitors in heavy equipment are all really located in one part of China. It's about two hours from Beijing by plane, and we've been invited in there to be part of developing the system with their support around that community. So yes, it will.

Excellent. Is that a three to five-year plan, or does that just continue to grow and you just exploit it as you will?

There is a major task force, including Ed Crawford and probably Matt Crawford and others -- will be in this community in the fall. It's interesting, and you have to be patient about China. It takes a while.

But clearly, they're viewing supply chain management -- you've seen our brochures. We've been there a lot. We've been featured on every magazine in China on supply chain management, and really getting a beta test site here in which they are encouraging -- I use the word encouraging -- all the -- for example, everyone that makes off-roadish equipment is going to be asked to share their supply base with us. And they will give us an open door to try to integrate and show them how we can do this.

So it is a very exciting prospect. We will be there in the fall. It's taken us three years to get to this (indiscernible), and it'll probably take us another three years. But when it breaks in China and when we are able to do it, and more important, control our own destiny. We're not interested in taking our technology over there just to have it adopted. And if we have to bounce off satellites out of Hong Kong someplace and scramble it, we will. But we think it's a tremendous opportunity.

Absolutely, it sounds great. I guess Detroit of China is Detroit, Michigan. Their gain is so-called our loss. I'm glad to see you guys pushing it over there.

A couple of housekeeping questions. Richard, I think you said in the press release that you've got some tax loss carryforwards still. Do you have any estimate either percentagewise or what cash federal taxes will be for '07, how much you still have in the till for operating loss carryforward?

Richard Elliott We should be largely covered for 2007. But there may be some 20% maybe of federal income taxes, might be susceptible to being a cash payment. We might make it all the way through without having to pay. It's very hard to predict at this point.

So you're using a go forward of 36 - 37% on the accrual. But is it closer to maybe 15 - 20% for cash taxes this year if you include state, local and foreign?

Richard Elliott Yes. 15, maybe 16 or 17.

Excellent. Do you have a CapEx budget for '07?

Richard Elliott We're looking to be around 15 million again.

15 million again. And I see your D&A, depreciation and amortization, went up slightly for the fourth quarter. Is that a good go-forward number? Are you looking at 19 or 20 for '07?

Richard Elliott Yes, 19.5.

19.5. Okay, I'll get off. Great quarter, great year, guys, especially with the slowdown in the industrial Midwest. And we've got some exciting things going forward. One final question, when do you guys move?

I have been accused of making this decision based like I'm buying an industrial company. Everything moves slowly around here about change. But year-end, we're going to do it one office at a time. We're not making a big deal out of this. This is something that's got to be done over a very slow but very methodical basis. So it won't happen between -- hopefully between now and the end of the year, we will have completed that.

It will be a nicer higher profile. Again, great year, great quarter, look forward to good things, guys.

(OPERATOR INSTRUCTIONS). William Sopko, William Sopko & Sons.

I have a specific question, maybe it's a minor question. But how is the Snow Dragon business doing?

The Snow Dragon business, it's been quite a year. As you know, we went into full production at the beginning of '06. We have sold a total of -- 26 units are in sale or committed to our distributors.

But the most exciting part about it, the largest single customer we had this year was the City of Moscow. They bought nine units. And the gentlemen that's been buying and reselling those units in Russia was here last week, and he thinks in terms of 40.

But this year has been dedicated to developing and putting in place a worldwide distributor network, which now we have I think 27 distributor agreements. Yesterday or day before yesterday, I was called to the parking lot. There was a gentleman -- actually two individuals from Sweden here for the distributorship for that country.

So it's a slow start. But I think every year from this point on, it's going to be an expanding business. And I think it is going to do very well. Actually, the back of our minds, we realized that our capital equipment business and our two plants that make capital equipment ultimately at time over a period of five - six years slowdown. In certain aspects, this business will be filled hopefully with our capabilities in our own proprietary capital equipment.

I think the Snow Dragon success is remarkable already with 26 units, and I congratulate you. Thanks for all your efforts on behalf of the shareholders.

Thank you.

Richard Paget, Morgan Joseph.

Just a quick one on the new aluminum customers. When do you think you guys will have that run rate up? Is it still kind of second quarter?

Let's say June. It will definitely be in place by -- most of it by June.

So I guess second half, there won't be any startup costs associated anymore (multiple speakers) --

It's all being absorbed as we speak, it's -- these are enormous (indiscernible). I would say this. For all of us that are concerned about these type of businesses, I have never seen a backlog of quoting activity that exists like it is right now.

Our Company, when they look around and look at all the other choices they have in this business, it used to be 20 to 25 people making these products. It's now down to six or seven. And a couple of them are very weak right now. So we're starting to see transfer work available to us that we never dreamed of.

Normally, you have to quote on programs two years ago. But there are transfer opportunities out there that we're bidding on. We will not do it for free. But the net result is there are companies that sense their current suppliers might have real problems here in the next couple years or as this economy -- or as they come through the slowdown in auto.

So we might get -- just like staying around the hoop in basketball. Sooner or later, you'll get a putback. So we're guardedly optimistic about the aluminum. But it's really -- from the second half on, we should really be humming with our investments.

Okay, great. Thanks.

Sir, there appear to be no further questions. I would now like to turn the floor back over to you, Mr. Crawford, for closing comments.

Ladies and gentlemen, again, thank you. We continue to have a lot of support from all of our stakeholders. I think we're -- one of my comments, I think we're really -- slowly moving this Company in the position of taking advantage of the future, particularly international future.

We keep investing in our supply chain management concept; we really believe in it. But we sold -- still believe that we have some very strong capital equipment businesses with the parts and service follow. And the aluminum business, we will slowly turn it to where it will be as it was once before, a very important part of the earnings stream of this Company.

We thank you again, and we look forward to being together again at the end of the second quarter.

This concludes today's Park-Ohio 2006 year-end results conference call. You may now disconnect, and have a pleasant day.