Park Ohio Holdings Corp (PKOH) 2007 Q4 法說會逐字稿

Good morning, and welcome to the Park-Ohio 2007 Year-End Results Conference Call. At this time, all participants are in 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 these relevant factors may be found in the earnings press release, as well as in the Company's 2007 10-K to be filed with the SEC on March 17, 2008. 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 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 in-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 11, 2008.

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. How are you today? Before we start the year-end conference call, I want to address the recent change in recording revenue in our capital goods business, which has been mandated by the outside auditors to meet GAAP requirements.

This $2.6 million in profit, or about $0.23 a share in earnings, historically would have been posted in 2007, will now be moved into the future. This changed according to GAAP in recognizing such revenue and profit towards completion and shipment of large equipment orders.

This is not a loss in earnings, not a loss in cash flow, not a restatement, not a [tumbleweed events], but a one-time accounting change. The Company became aware of this approach in February after the close of the fourth quarter review.

Let me give you an example this morning to try to point out what we mean by a percentage of completion. The capital goods business is an unusual business where you're, like, getting large orders, let's say a $10 million order, and you get progress payments. You might get 25% of that down, and you could get another 40% in six months.

So, historically, we have approached that on the basis that as the orders progress through the timeline and we are getting progress payments, obviously, we were concerned, and our customers concerned, that, in fact, the equipment was at that point in its completion as represented by the deposits.

So it was a way of really taking out the lumpy nature of the profitability of the transition from the order to the completion of the order. We are now in a process of changing that. We'll be addressing it, but to meet GAAP standards, again, indicated by our auditors, we've made the change. Unfortunately, those dollars will not be posted in '07, but they will be posted in the future again. They have not been lost in any fashion or form. It is a change, quite frankly, I'm more comfortable in reporting in a percentage of completion because I think that better reflects -- it takes out the lumpy profitability, which now will be the result of the new approach, where we will be taking the profits and posting them when the order is very, very close to completion. So we'll be working our way through this year.

Incidentally, this segment of our business, the capital goods part of the business, has been very robust and will be in the future. So this is all very positive. We, again, apologize for the change, but again, these -- the profits that will be moved from one year into the next and -- or at least the high percentage that will be for this fiscal year.

Now, I'd like to turn the review of '07 activities, which I think are very positive considering everything. We had a great year, and I'd like Matt Crawford, the President and COO, to address and review the '07 activities. Matt?

Thank you very much.

The fourth quarter performance was consistent with most of 2007 in that balance diversity was paramount to overcoming some very challenging end markets, especially auto and truck. Our results were, again, led by good business environment globally for our manufactured products segment, while our other segments focused on business expansion and margin enhancement.

On a consolidated basis, after the effects of the impact that our CEO just discussed, fourth quarter revenue is down 8% to 248 million; EBITDA was down 18.5%; and EPS was down from $0.94 last year, which included the $5 million tax reversal benefit, to $0.34.

Now, turning to the segments --

With regard to Supply Technologies, first of all, I want to point out this is our first conference call referencing ILS with its new name, Supply Technologies. This name change was the final step in a rebranding effort, which we believe better positions the Company for growth and better aligns the name with the increasing breadth of services the Company provides. Feel free to visit our website. Unfortunately, this exciting step forward did not allow us to overcome the 14% drop in sales to $127 million. This drop says less about 2007, in our opinion, and more about the significance of the fourth quarter in 2006 during the heavy-duty truck pull-forward to pre-buy.

Sequentially, sales were down 5% to 6 points -- or 6.6 million, excuse me. This softness stemmed largely from the International Truck strike, an important customer to us, as well as some modest pockets of weakness in appliance, auto, defense, and building materials, which offset strength in new business and consumer electronics, the industrial equipment, and medical equipment segment.

Not surprising, EBIT was also down year over year by $2.2 million to 6.8 million. Once again, this speaks mostly to the strength in 2006. Sequentially, margins slipped from 6.2 to 5.3% due to a combination, including the International strike and lower sales volumes.

Looking at manufactured products, revenue took a breather after several quarters of significant growth and dropped 5.7%. As indicated in Ed's opening comments, we do not believe this is indicative of the current state of this business, which continued to be strong, and our backlog at year-end demonstrates that we expect this to continue well into, if not through, 2008.

We're currently quoting on excess of $100 million' worth of new equipment orders, and although we cannot be sure of our success in receiving these orders, it's indicative of the continued demand for our products, particularly in foreign countries.

EBIT continued to strengthen by 16.1% to 10.5 million, and margin increased to 12.6% from 10.3%. Although the timing and profitability may be more volatile in the future, we expect more high-margin capital equipment business and greater throughput in our forging business. Combined with a stabilization in our rubber business, that should help us to continue to sustain higher margin levels.

Looking at our casting group, revenue at our aluminum products segment expanded by 10.5% as we continued to benefit from new business volume. We have benefited now over a couple quarters from new business, which doesn't show the issue of lower unit volume in some products, which is hurting us. We expect this trend to continue as we continue to quote larger amounts of business, but current volumes are somewhat unstable. We hope to still achieve the $200 million run rate during 2008.

EBIT was slightly better this year, although we still showed a loss of $265,000 in the fourth quarter. This is especially disappointing in light of the fact that we achieved profitability in the third quarter, but a sustained increase in profits is difficult to manage during this time of consecutive product launches.

Looking at our balance sheet --

Non-cash working capital decreased again in the fourth quarter by 1.2 million. This was largely in response to lower A/R, associated with lower sales.

Bank borrowings were 145.4 million at the end of the year.

Our long-term debt pay-down was -- or our long-term debt was cut by $14.5 million during the entire year of 2007. This was short of our $25 million debt repayment goal, principally because of the sizable amount of WIP that's currently being processed in our capital equipment group.

Capital expenditures ended the year at 21 million. This was somewhat higher than we expected, but 2 million of it was caused by currency fluctuations on four PP&E investments. We expect capital expenditures during 2008 to be in the similar range of 17 to $20 million.

Cash taxes for the quarter were 1.8 million. We expect 16% cash tax rate to continue to be a good proxy and currently expect our federal tax NOL to extend through 2008 and even into 2009.

In closing, we're enthusiastic about business development activity at both Supply Technology and [Gamco] and believe confidently that our manufactured product segment will grow nicely to 2008. We are concerned over uncertainty in pockets of the U.S. economy, raw material increases, and the timing around large equipment capital orders. Accordingly, we expect 2008 EPS to be in the range of $2.10 to $2.25.

Thank you very much.

Thanks, Pat.

Just a quick pick at -- peek at 2008.

First, let's talk a little bit about the Supply Technology. I think when I look back at the new business, you know, when you think of trucking being down close to $90 million in '07, actually, much deeper, you know, we started the year probably thinking that could've been 50 or 60 million. It was a very, very deep decline. We think that it's stopped.

On the other hand, we did write 30 or $40 million of new business last year into that slowdown. The new business [to be] written -- I still believe this year, '08, we'll be adding new accounts, and we are awaiting an upturn. We all know that in 2010, as it was four years ago, there is a new mandate relative to emission controls. There will be new trucks, new engines. That's starting to bubble up right now. We don't have a lot of that in the '09 forecast, quite frankly -- '08 forecast, I'm sorry. But we see a little pick up in the trucking in the fourth quarter, not a lot to be talked about. So, really, it's going to be an '09 and '010 event, which I think is going to be an important part of the next two years for us as that rebounds.

Over on the aluminum side, things are moving as expected. We can keep getting new wins. Recently, we just got an order, which will come out in the first quarter of next year, which is a $20 million-plus order. So for the first time in the history of General Aluminum, our aluminum division, we'll be reaching revenues, run rates of over $200 million per year. We're getting, finally, the full absorption in the plants, and even in the tough economy, when you think about the auto industry, we are growing that business. There might be less cars being made, but we're getting a bigger piece of the pie, and from our viewpoint, that is growth, and we see a further consolidation in the industry of suppliers.

We continue to believe we're at the right place at the right time. It's lagging behind what we sensed would be the results of this even in '07 and possibly '08, but as indicated in the past, I think this is an important part of the future.

Capital goods and manufactured products -- I can't say too much about that. It's been great. We talked about the robust nature of this business going forward, particularly in capital goods, but across the board in rubber, in a lot of the units -- forging, the aerospace, the railroad business -- if you were in markets and you could pick your markets for the next two or three years, it would be aerospace, it'd be the railroads, and it'd be the steel industry, internationally and both domestically, and we've got deep roots in those areas, and they will serve the Company well from profits and revenue in the upcoming years.

At this time, I'd like Nelson to open the lines to questions from our stakeholders.

Thank you. (OPERATOR INSTRUCTIONS)

Our first question is coming from Richard Paget of Morgan Joseph.

Good morning, guys.

Hey, Richard. How are you today?

Doing all right. Wondered if maybe you could talk a little bit more about your guidance range. I know you said that with the manufactured products you expect that to still grow, and then in aluminum products, you know, approach that, that $200 million run rate. Does that suggest that Supply Technologies, at least on revenues, could actually be down year over year?

Richard, I'll try and talk about that. It's Matt. No, that was not intended to say that at all. I think that we are obviously still in a difficult market for trucks, which is a key market for Supply Technologies. We are also, I think, in a difficult market for them in some of their durable goods. We've seen some weakness for the first time in things like appliance, and then, obviously, to the extent that we are involved in construction, we've seen that. But our new business activity is still very strong. So I anticipate that that business will have a challenging year, but I suspect that they will grow, and we expect them to grow during 2008.

Okay, and, well, maybe I'll frame it differently. I mean are you guys, with what your assumptions for 2008's going to look like, thinking that the U.S. economy is going to go into recessionary mode, or do you just think there's an overall slowdown?

Well, what we're seeing, and again, through our many peaks internationally, as well as domestically, we see, particularly in Supply Technology, a general slowdown, but we see no real compression in that area, and that can be easily offset by any -- any -- movement in the truck industry, which, again, Richard, is -- the demand is building, it's pent-up in it, and we know that sometime before '10, that there will be a sizable run in the business, and as you know, we're well positioned there.

So, no, we have not seen across the board. There's always little segments here and there, but whatever we've lost from the domestic side, even in the Supply Technology, it's being picked up internationally. I mean this company, as you know, is growing dramatically as a percentage of sales in the global economy. I mean that is change from -- what would you say, Richard, the total global content of the business in the last five years is growing from what?

You know, foreign sales has grown from under 20% to almost 30% in 2007, and we expect to see that continue to grow in the next couple years.

And, of course, as a bigger pie. So, no, quite frankly, the capital goods business is very solid. I think we're excited about the prospects internationally.

The aluminum business -- we're just taking a larger part of a smaller pie, if you want to look at it that way. Maybe that's my -- I view that as growth. So the cars can go down, and we could still grow that business because we are, again, I think the quality low-cost producer.

As far as Supply Technology, a lot of balance, no great big holes, and the one hole that's there, it's been there for 18 months, and it's still there and will get filled, and that's trucking.

And then on the industrial group, if I kind of do a back-of-the-envelope and try and back out that accounting change impact, I mean it seems operating margins could've been north of 13%. I mean is that kind of a good run rate to go forward, or should we assume things are still in that 11, 12 area?

I'll take that one, Richard. As I said in my comments, the product mix we have going, the stabilization of rubber, the throughput through our forging business, both in aerospace and rail, and the demand for all aspects of our capital equipment group would lead us to believe that there is good effort here or good momentum to achieve higher margins. Being able to predict that on a quarter-to-quarter basis, particularly in light of how we're now accounting for the capital equipment business, will be very challenging. So while I can't speak in numbers, I can tell you that it bodes well for margins.

Richard, let me give you another angle at that. This rubber business, which was quite challenging for a couple years to us, is really starting to go just in the opposite direction. We have written for the first time in that facility. As you know, we were anchored in a lot of relationships with the Japanese on one side of the aisle relative to certain products. Honda is a new customer, a brand new customer of ours, in the last four months in that particular company -- location. So this is an important breakthrough in the potential for that.

Again, coming back to the railroad industry, you think it couldn't get any stronger, but quite frankly, it seems to be getting stronger. Demand for railroad products, our diesel locomotive crankshafts and the center plates, is just more than we could have ever dreamed of even six months ago. So between -- you know, in the pipe and the gas and oil and the drilling with our equipment, we don't see any slowdown there, quite frankly. We see a chance to even go further.

Okay. And then just, finally, corporate expense seemed to jump up a little bit in the fourth quarter. Any one-time items in there, or is that just kind of year-end accruals?

There's just some lumpiness on a quarter-by-quarter basis, some year-end accruals. If you look at the full year, the change is essentially stock-related compensation.

Okay, thanks. I'll get back in queue.

Thank you. Our next question is coming from [James Ishwar] of Singular Research.

Hi.

Good morning.

Morning.

Morning. Two questions. One is could you give us some guidance on overall revenue growth for 2008? And I'll ask you the second question later.

I would comment by saying we specifically chose not to give a number because of some of the uncertainties we mentioned in our forecast. But it is our expectation that the Company will grow in 2008.

And then the debt repayment -- do you expect to have any debt repayments in 2008?

Yes, certainly, we did not meet our goal, as I mentioned, because of some of the cash tied up in some of our WIP, particularly abroad. I would tell you that our cash accounts, particularly those internationally, where we have tax ramifications, whether or not to bring those dollars back and use it to pay down debt, our challenge is to developing an overall forecast for debt pay-down, but it is our expectation to pay down debt in 2008.

Could you give us some indication of how much would pay down?

I'd prefer not to at this time. I think we'll have better follow-up on that in the first quarter call.

Okay. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS)

Our next question comes from [Michael Levine] of BB&T.

Good morning.

Hey, Mike. How're you doing?

Good, thank you. How are you?

Very well, thank you.

Just a quick clarification. On this accounting thing, I guess reported EBITDA of 16 -- what was the number, 16-something? Would that number go up by 2.6 million without this new accounting change?

It would go up by 4.

It would go up by 4.

Pretax, yes, because it's EBIT -- EBITDA.

Okay, all right. Great. And when we think about going into '08 in your projection, for manufactured products, I know it's lumpy, but is that going to see -- when we think of the full-year results, is that going to be boosted by what you're taking from '07 into '08, or is it just going to be basically a 12-month kind of normal run rate thing because you're going to lose some on the back end?

Michael, you hit on the issue with your last couple words there. The business is doing great. The timing of large order signings and where they sit in the WIP at the end of the year is the real trick, and as I mentioned, we're quoting on a large amount of activity.

I can talk in terms of operational metrics, backlogs, really where we are in terms of -- from an operational sense, in terms of percentage of completion, but what is difficult to characterize or measure is 10 months from today from where we're going to be in terms of that percentage of completion at the vendor level and in those plants. So while I think, as we sit here today, we have taken a reasonably conservative approach to figuring that out, it is very challenging to do at this time.

Okay. All right.

I mean if you think about it, what's happened here is this change in the way we're viewing percentage of completion has pushed out revenue recognition over the business cycle. It doesn't really pay its mind towards quarterly and year-end cut-offs. So we have -- we expect that business to grow, we expect it to be more profitable, but it's difficult to measure it on a cut-off date at this time.

Okay. And I guess, lastly, so from what I've heard today, it sounds like manufacturing is going to grow, the aluminum products are going to be over 200 million in revenue, and you said Supply Technology, although there's no number, you expect that to grow, also. So in each one of your segments, you're really expecting year-over-year growth on a top-line basis?

The answer to the question is yes, but I want to be specific on the casting business and tell you that the $200 million number we're referring to is a run rate number. So we do not expect to hit that run rate number in the first quarter.

Okay. Okay, so does that mean by the end of the year you're going to be in a 200 million run rate number, or is it 200 million for like the whole year?

No, no. We expect to hit the $200 million run rate number sometime during this year. And then depending on unit volumes, which I've mentioned are under pressure, it could be a little bit later than we had hoped initially, which would make it less likely that our annual revenue would be at 200 million.

But the revenue will be up year over year.

Okay. No, that's good clarification. All right. Thanks very much.

Thank you.

Thank you.

Thank you. Our next question comes from [John Baum].

Guys, good morning.

Morning, John.

How are you today?

Good, good. Couple questions 'cause I'm always more of a balance sheet guy. I see book value per share is up 2.81, and the GAAP EPS was only up about a buck 82. The dollar difference, is that mainly foreign currency translation, or what are we talking about with the increase right there?

Yes, that's primarily FX.

Okay. And you're not giving any guidance for end-of-the-year debt pay-down on the revolver, but with the decrease in pricing, either on prime or LIBOR, does your guidance for this year include the roughly 200 basis-point decrease that we've had in those pricing metrics so far this year?

The answer to that question, John, is yes. I will -- I think the -- we've been somewhat conservative because short-term rates are volatile, and as you know, a significant portion of our debt is fixed already. But, yes, we have taken that into account.

Okay. I'm seeing goodwill went up by 1 million in the last -- in the last quarter. What did that relate to?

That related to a -- when we finished the purchase price accounting on the -- and the tax ramifications of the NABS acquisition from a year ago, we finally wrapped up the last analysis of that this year. That resulted in a slight increase in the goodwill associated with that.

Okay. The aluminum products side, I know you talked about the -- you've talked about annual run rate maybe approaching 200 million. Are you expecting any increased profitability in that going forward for '08, or is that going to be sequential, or how shall we look at that?

Well, yes, but the -- you know these platforms are launch platforms, and any revenue that we're really -- begin to change probably latter part of the year, third or fourth quarter, is -- when it's in place, the expenses have been absorbed in start-up. As you know, these big jobs we ramped up in our Conneaut plant, at $30 million, it's just now in place, and that's been coming up for four or five months. These are big transfers.

So the results of that, there will be a -- I think a noticeable increase in volume year over year, and the profitability, when you see the change as it starts to develop quarter by quarter, you can anticipate the revenue to follow, lag behind it one quarter or two --

Earnings, you mean.

-- in the earnings from it.

Ed, what are your historical margins in the aluminum products side when you're really up and running?

Well, this is interesting. When this business was a $90 million business many years ago -- seems like many years ago, five, six years ago -- before we decided to grow it, this was a business that running EBITs continually in the 6+% range comfortably, and we have been -- again, this is -- I think if you look at -- I'm glad to see Buffett decided to get into the auto parts business along with us because it is something that a couple years ago was risky to expand into something that was decompressing like this, but I still think we're in the right place at the right time.

We will get to achieve the revenue numbers, and the profitability will follow, but it's -- it's slow going, but we're at a point, and I think the -- everyone is going to be very pleased with what they're going to see in the next 12 months, first, on the revenue side, and soon to be followed by the profitability. But this is a business that should be able to get up over 5, 6% easily as you get absorption.

Okay. Do you feel you've got -- I know you're cautious on EPS visibility right now, and it's fair to say that the country's kind of slow right now, at least in industrial, but are you feeling better in the second half than the first half, or can you give a little color on that?

Yes, I think, the -- clearly, we -- the closer we get to the rebound, number one -- let's look at the big -- the things that early could affect us.

Any real turn -- you know, you can look at the economy and you could be depressed every day by reading and listening. I've stopped listening to the programs. But we're running the business. But [when] we look into the near future here, the things that will affect the Company dramatically is any movement towards the reenergizing of the trucking business. That is in the queue. That is coming at us. It's when.

And we did reduce costs last year even when we added $30 million of new business, and we're going to add new business this year. So it seems like it's applied technologies in the holding pattern, but it's in a holding pattern waiting for -- and we're maintaining the cost and the structure to be prepared to come back and write another $100 million of trucking business. We're carrying those expenses. We need -- so that's right there.

As far as the capital goods business and the other side, that's running as hard as it can, and we're waiting for the aluminum. So we've got one of the engines running full, and we've got the two other engines -- one's being built and ready to go, and Supply Technologies. So we're being careful because we want to be right in '08 here. In other words, this is the time when this company can do the right things, can get profitability, and run in what's going to be some rough weather. So our guidance is based on the fact that we look at the economy as a little gloomy.

Fair enough. A couple of last questions here. The $0.23 deferral, as you call it, on the -- for the -- percentage of completion, completed contract, is that being assumed to go into '08, or does it get stretched further than that?

I think the -- John, it's Matt. The $0.23 specifically related to those contracts that existed in the end of '07, that $0.23 will be received in '08. The issue that was actually pointed out a few minutes ago to make it challenging is in a growing business, let's assume we receive $100 million of new capital equipment orders that we're all very excited about, and even if they're on wonderful cash terms, from a GAAP perspective, there could be a lot of pressure on GAAP earnings at the end of the year to the extent that a lot of the work is in process. So that's the net that we're having a difficulty with.

To press the point a little further -- and maybe, Rich, you could touch on this -- I mean what's the issue? Is it that it goes too far out to recognize it so there's some risk that the customers will accept the goods, or is it just that auditors are being more cautious right now, or what's the theory?

John, let me -- I can be specific, and Rich could probably clean it up a little bit. The very specific point here is we have -- because we don't -- we're on an extended high end of the cycle and we hope it continues to grow, but from a historical perspective, the business is doing very well on the revenue side. We have been cautious about adding manpower in places like Western Europe and even places like U.S. So we have been doing more subcontracting than we have historically.

We are very good at subcontracting. We have four full-time project managers that do nothing but run around and follow how those subcontractors are doing. The area of influence at the end of the year and going forward will be -- understanding how those subcontractors work will be incorporated into the percentage of completion.

And this wasn't as big an issue in the past because the business (a) wasn't growing as quickly, and (b) we weren't putting pressure on management in that unit to outsource more instead of adding people.

So what we need to work through is to understand better how to make sure that we can incorporate those revenues into our revenue and earnings as we continue to outsource what I view as the commodity portion of the business to places like India, to places like China, to places where we can make it cheaper and make it closer to the places where the product is ultimately going to be shipped and assembled.

Fair enough. And, finally, obviously with mostly an $0.08 miss and getting hammered in the market here 24%, is the stock buyback still in place? What does the Board say about that?

Yes.

Well, what's the overall allowance for -- how many shares are still outstanding on that?

How much?

Upwards of a million.

Upwards of 1 million shares, John.

Okay, was anything bought in the fourth quarter?

Yes, but --

I'm sorry?

Yes.

Okay. I'll wait for the K on that. Thanks, guys. I'm done.

Thank you. Our next question is a follow-up coming from James Ishwar of Singular Research.

My question refers back to the deferred revenue and the earnings associated with it. Exactly when do you expect to recognize it? Which quarter do you expect to recognize it this year?

To recognize the $0.23 [inaudible]?

Yes.

But once again, the $0.23 specific to those contracts that were deferred in the end of -- in the fourth quarter, will -- and I don't -- we don't have a chart in front of us, but I think it would be fair to say will be largely recognized in the first two quarters of this year. Once again, how that shows up on a net basis depends largely on how much new work we have outsourced at the end of the first and second quarter.

But to reiterate all of our point here, that $0.23 didn't disappear. It will come -- those projects will -- we will get the GAAP revenue and profit related to those in the first two quarters.

Thank you.

Thank you. There appear to be no further questions at this time.

Well, ladies and gentlemen, thank you very much. We look forward to a prosperous year for the Company, and thank you for your support. Good day.

Thank you. This does conclude today's Park-Ohio 2007 Year-End Results Conference Call. You may now disconnect, and have a wonderful day.