Park Ohio Holdings Corp (PKOH) 2008 Q2 法說會逐字稿

Good morning and welcome to the Park-Ohio Holdings Corporation second quarter 2008 results conference call. (OPERATOR INSTRUCTIONS) 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 2007 10-K filed with the SEC on March 17, 2008. The company undertakes no obligation to update any forward-looking statements, whether a result of new information, future events or otherwise.

Additionally, the company may discuss EBITDA. EBITDA is not a measure of performance under general 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 August 11, 2008.

Now the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer. Gentlemen, you may now begin.

Good morning, ladies and gentlemen. Welcome to the second quarter conference call at Park-Ohio. I have with me Matthew V. Crawford, the President and COO and we're fortunate today to have our new CFO with us, Jeff Rutherford, in attendance. Matt? Thank you. We're pleased to report a solid second quarter of 2008, especially in light of significant weaknesses in the automotive end market which affected several of our companies. On a positive note, the supply technologies business showed strong sales and earnings growth and manufactured products continued to demonstrate solid, overall performance. On a consolidated basis, revenue was basically flat at about $286 million and EBIT was down $1.8 million to $15.7 million. Earnings per share was down slightly to $0.49 versus $0.50 cents for the same period in 2007.

Now turning to the units, the Supply Technologies Group, revenue was up 5.7% versus the same period in 2007, end markets showing the most strength included the industrial equipment, medical equipment, truck and bus, consumer and other electronics, appliance and power sports. These gains were offset by weaknesses in auto, defense and employment. Sequentially, revenue was also up 7.2% from the first quarter of 2007. EBIT for the group was up 18.7% to $6.6 million due to both incremental revenue and margin enhancement. As we discussed during the first quarter call, we're working hard to contain product costs and expenses and have begun to see the benefit of these cost reduction efforts taken during the first half of the year. We expect to see additional margin enhancement as we see increased operating leverage from new sales.

Turning to Manufactured Products. Manufactured Products revenue declined about 3.3% to just over $103 million while aerospace, rail and power generation stayed strong. These gains were offset by some modest auto exposure and the shift in timing in some capital equipment orders. Order activity and back log would indicate that the second half of 2008 should be similar to the first half. EBIT was up a little bit, 1.8% to $14.4 million due to product mix and excellent utilization in most of the major manufacturing facilities. Looking at Aluminum Products, revenue was down 9.4% despite significant new business, which has been implemented during the first half of the year. Although we continue to see considerable sales and growth activity, we expect continued softness from our end customers. EBIT showed a small loss for the quarter. Although this was a significant drag on earnings year-over-year, there was a sizable improvement versus the first quarter loss of approximately $1 million due to increased manufacturing efficiencies in the newly implemented businesses and overall cost containment.

Looking at the balance sheet, total net debt decreased during the quarter by $12.2 million, despite some seasonal increases in working capital. Capital expenditures were $4.7 million, in line with our 2008 forecast of $18 million. Cash taxes were approximately $2 million and we still expect our federal NOL to extend through the 2008 and into 2009.

In closing, although we're pleased with the overall performance of our business, the first half was a little softer, especially in automotive, than we expected. Having said that, we're pleased with the progress made in Supply Technologies and the continued strength of our Manufactured Products group. Therefore, we're optimistic about the second half and confirm our 2008 guidance of $2.10 to $2.25. Thank you. Thanks, Matt. Just a couple of thoughts on individual units for Supplied Technology. I want to point out that our hard commitment in execution of the raw material increases that we have been receiving from offshore from our suppliers for the last six months, we continue to pass those directly on to our customers. There's always a certain amount of resistance and there's time lag between when we get the new pricing and when we're able to implement our new pricing, but clearly, this is being accomplished on an equal basis, so we believe that we've been able to pass on the majority of our increased costs that we're receiving from our suppliers worldwide. That's an important commitment. It's a difficult one. No one likes price increases, but in reality, this is what we're facing when you are selling the products -- when we buy our steel, particularly from offshore. As the steel prices go up, we pass them through to the customers. Again, echo Matt's comments, I think Supply Technologies is pretty much where we expected it to be and we're optimistic about the balance of the year.

We do have a little bubble, I wouldn't say it's a lot of heavy wind, but clearly trucking -- we're hearing murmurs that trucking might come back and, in fact, some of the key management of Park-Ohio and the Supply Technology company were in Leone, France less than a month ago to receive a North American award for confidence in supply at the highest level from Volvo. So a lot is happening over there, a little bubble from the trucking. Again, there's a segment of the auto there that hurts it, but the management, I think, of that particular unit are doing an excellent job in keeping [inaudible] where it should be relative to the future of that particular unit.

Manufactured Products, it kind of speaks for itself, gas, oil, and steel is robust. The steel is robust, railroads are robust, forgings are great and, again, the numbers speak for themselves and we have visibility in the future that says that we hope that will continue for as long as possible, but clearly through the balance of the year.

The Aluminum Business, this is, again, one of the areas that we continue to make investments. We've been talking about this for some period of time. Actually, we expect it to have -- this to be the banner year which the Company broke out, but if you look at the sales year to date and when you think of all the different platforms and you have to look at the platforms in the aluminum supply business when you're making components. Some cars are selling better than others, but our ability -- we have been adding, adding sales to the company. We have been awarded a lot of new business or else we would not be -- with all the current customers we had going into this year in the latter part of last year, we would not be equal or virtually flat on sales without adding new business because a tremendous amount of sales has been lost to the economy. So we believe that this is still a place that we can be active.

Let me give you just another example of what, as we predicted, the meltdown of the supply base in this one segment, probably in the whole automobile market, but this is definitely -- there's an attraction here even more than I thought. There was recently an auction of a company in Ohio that, in fact, a year and a half ago on a run rate, a dead competitor to our Company's general aluminum, doing in excess of $120 million of sales. That company went bankrupt and two plants, 150,000 square feet of buildings, and the equipment in place to do in excess of $100 million of sales was sold at an auction and we were the acquirer and we paid $3 million for that capacity. We consider this a very important step.

We believe that at 16 million cars, it will be great. Even at 12 million cars -- we hope that it's not there, we hope all our car companies survive -- but the net result is we're building up a tremendous capability at a very, very low cost and, as I've said, sooner or later, I think that will come home and as soon as we start -- and I realize that Chrysler won't lease cars anymore and Ford's backing away from it, but I do not believe personally that the cars are going to go away. They'll be reshaped. I don't think the soccer moms are going to give up those big RVs. They might have different engines in them. They might be different, but they're going to be out there. As we get through this, the number of suppliers, the number of companies that have our capabilities in the aluminum components industry are few and far between. We think we'll be the leader. We're optimistic about this down the road and we've been able to, again, accumulate a tremendous amount of assets that will never be replaced in the future.

So, pretty much before we open the questions, we're -- our primary goal here from the first day of this year was to be more profitable in '08 than we were in '07 and I think we're on target to accomplish that. I'll be glad to take questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Richard Paget of Morgan Joseph.

Morning, guys.

Richard, how are you today? How are you?

So you couldn't have gotten those plants for just $2 million?

Actually, it's strange you would ask that question. Hopefully, you'll have an opportunity to come in and see it, but there were no other bidders. I mean I know that's strange -- hard to believe, but that's how little people think of the assets in the aluminum component business in North America. But I think you will see in the future that there will be cars, there will be aluminum, there will be fewer suppliers and this is a great, a great acquisition for the company and I think we'll see the benefits in the future.

I mean how much further consolidation potential is there in that business? I mean are there still a few more competitors out there who will probably be by the way side or do you think it's starting to get to a level where it might equal out?

Well, if I said -- if I looked back ten years or 20 some in the business, I think today there are probably six capable, one is -- well, in my opinion, will be going out of business here in the near future. Richard, in the facility, give you an idea -- because this particular company had a unique capability in making cores. But we have written orders. In the plant that we just bought for $3 million, one of the plants, over $35 million in new business for '09 in those facilities. My point is that, yes, companies will continue to disappear because, quite frankly, it's a very, very tough business. A lot of financial people in it.

You know, when it comes down to plain operating, it's a tough business. I think we're good at it. But I think to your question, this could get down to four good companies and at that level, even at 12 million cars, it will be a growth business relative to -- but again, as you know, we've garnered a lot of capacity, top end equipment, good teams, good people and we're just beginning to see that competitive nature of bidding, the pricing we believe we can get in the future should start to improve because there's few people that have the capacity to make safety-critical parts for the aluminum industry like steering knuckles.

So maybe, you know, I've been talking about this for almost two years, so I think we're right here, but a great opportunity and hopefully it will start to show an impact. Keep in mind, the Company's flat in sales for six months and everyone knows the deterioration in (inaudible), so we have added sales, we have continued to add sales. If we can get this car market -- and they will be back, if we can get this car market up to 14 or 15 million units, I said we really will be the benefactor of that.

So do you think in the near term, and by near term I mean the second half of '08, we could still see break even, maybe slight losses in aluminum and this is more of an '09 story?

It's definitely an '09 story and I will tell you that you can imagine, we lost a lot more in the first quarter than we did in the second quarter and the sales weren't that much different. The pressure we have on the cost and the operations of that company in the second quarter is reflective of what we will do -- after we got fatter in the first quarter, we didn't sit here and say we're going to get battered every quarter and you look at the difference, the swing, you subtract the losses in the first quarter and the second quarter, that's the result of taking the aggressive action necessary to -- you know, you can be on the offense one way when you're buying assets and ready to deploy them, but you've got to be on the defense here because we have absolutely no idea when this is going to come to an end, okay? So we're going to run General Aluminum as tight as possible. It's an '09 event, probably, by the time they get around to financing cars and the market clears up. So we've just got to run tough, but we have the capacity, we have the customers, there are fewer competitors. I think it's good for us for the future.

Okay. And then moving on to Manufactured Products, Matt, you mentioned that you expect given back log trends that revenue run rate in the second half should be similar to the first. Does that hold true for profitability as well? Should we expect some more margins?

Well, yeah, I mean we're cognizant here of the growth track that the Company's been over the last several years, so -- but, no, we're optimistic that the business activity globally is consistent with what we saw in the first quarter -- or excuse me, the first half, and we expect at both lines be about the same as it was the first half.

Okay. And then finally, on Supply Technologies, I mean it looked like some of the volumes for North American trucks out of Volvo were -- had some positive comps a couple of months in the quarter and I think you mentioned that you did see some activity in the trucks. I mean how much -- what are they saying going forward? Is it still tough to predict the visibility or are they definitely starting to see a bottom here?

Well, I think that, you know, the year-over-year comparisons are a little misleading because the second quarter of '07 was tragic for no better word, that's the only word I can think of. Sequentially, quarter over quarter, truck was up, but I don't know that that would -- I don't know that I've read that anybody believes we're out of the woods yet on truck. You know, certainly the performance is off of their trucks, clearly. If that means it's sustainable, I don't know. I haven't seen any estimates that really believe that the class A truck build for this year is going to be much higher than, call it 215,000, 220,000 trucks. And I've even seen some cautioning already about the rebound in '09. So, I think we're off the lows and then probably we'll stay off the lows, but I would say candidly that doesn't say much.

Okay. Thanks. I'll get back in queue.

Thanks.

Thank you. Our next question is coming from Michael Lewis of BB&T.

Good morning.

Good morning, Mike, how are you?

Good, thank you. I know it might not be the best metric to measure your business by, but in the past you kind of mentioned $200 million sales for Aluminum Products. I know you're making up ground with new business, is that a possibility still or not likely?

Oh, yes, it's definitely a possibility.

It is?

Oh, no -- I mean -- you mean this calendar year?

Yeah.

No, not this calendar year. I don't think it's -- I don't think that would be probably remote to accomplish. We could get lucky if things perked up, but what we know today, we're thinking in terms of $170 million, in that range, probably, maybe a little bit -- give or take $10 million.

Okay.

I mean it's just -- we're -- it's all -- I should drive around to all the auto lots and find out what they sold for the day. I know the cars that our platforms -- I should drive around and check every single day a classic here in town and I would have a better feeling on this, but it's really -- this is just getting ready for the market to start to pick up when people get the confidence to buy cars.

That's understood. On the manufacturing backlog, is -- in the past you said it's strong and I guess it's still strong. Is it growing or is it strong, but maybe a little less? Any direction on that?

This is Matt talking, Michael. I would say candidly, it's hard to -- those are major products. Some of those are projects that are $10 million, $12 million, $15 million kind of discreet orders, so I hesitate to measure backlog at any given moment because if a $15 million order comes in, it could skew things either way. So I'm more interested in sort of characterizing the feel of those numbers and I would tell you that the feel of the numbers in the backlog for the remainder of this year are as good as we've seen in the recent past. So I would indicate to you we're expecting business to stay as strong as it's been.

Okay. That's what I was looking for. Did you say something about the timing of orders that maybe some didn't come in and are going to be pushed off to the third?

Yeah. I didn't want to -- I didn't want to get into it, but I'll mention it one time briefly, which is the whole source of percentage completion issue at the end of last year --

Right.

It's changed the way in which we kind of recognize revenue a little bit. So all I'm trying to point out is that we're a little bit more shipment oriented now than we're percentage of completion oriented, although we're technically still on percentage of completion accounting. So, I didn't want anyone to make too much of the sales decline because I don't think it's indicative of the way in which the Company's performed.

Okay.

That's kind of what I meant by timing.

Okay. And lastly, SG&A seemed to jump a bit. Can you kind of go through the particulars of why it went up?

Yeah. It's up -- it's up in manufacturing and in corporate. It's up in manufacturing because it's a -- takes a greater effort of selling, travel and so forth and the European sales and we're comping against the German location for manufacturing. So that was all planned. As far as corporate SG&A, we're comping against some issues on timing and also in some professional fees and salaries. I guess my answer to that is there are opportunities there in corporate expenses and we're going to be taking steps to address some of those G&A issues at corporate. But most of that change is some timing on some professional fees.

Going forward, if we look at this quarter versus maybe previous quarters, is it going to be closer to where we are today, maybe trending down?

We would expect it to come down slightly off of what we're turning right now.

Okay. Okay. That's it for me. Thank you.

Thank you. Thanks, Michael.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from [John Baum], a Private Investor.

Good morning, gentlemen and particularly good morning to Mr. Rutherford.

Good morning.

Hi, John, how are you doing? Hi, John.

Good, good. Let's see, most of the questions have already been answered, a pretty solid quarter. Are we still working with a 17% or there abouts for all in cash taxes for this year?

John, I didn't work it out as a percent. I would -- I think that $2 million range is indicative of what we would expect to see.

Okay.

Yeah, it's primarily international and it's going to run at about that same rate. I think it was the same as the first quarter and second quarter and with our NOL for federal taxes US, we shouldn't have an issue on US federal taxes.

Again, you're saying $2 million for the full year or is that for cash taxes or is that --

That's a quarterly number.

For a quarterly number. So we're talking about eight for the full year?

Yeah, approximately.

Okay. Let's see here. Is there any -- are you seeing any softening in Europe right now with some of your European operations and also contained in that, what about the foreign exchange component with the dollar strengthening?

John, I'll take the first half. You know, I think that most of our European business is in our Manufactured Products group, so what we're doing there is principally in some of our proprietary products, so when we think about for example, our manufacturing capabilities in Belgium or Germany, we are largely shipping that equipment not just to Europe, but all over the world in products that are in very strong industries right now, most notably oil and gas. So I would tell you that we also, of course, have a service and repair business there which is also servicing those same industries. So although I think that there are some maybe negative biases there to growth in western Europe, our businesses, so far, have been insulated from that.

Okay. As far as foreign exchange with the dollar strengthening, is that going to -- is that a balance sheet issue with the statement of comprehensive income or how is that going to play into it?

Yeah, it does come into effect on the balance sheet through comprehensive income. I'm not going to predict where the dollar is going to go in the back half of the year, though.

Fair enough. Any -- sorry, go ahead.

John, I would just also comment that, a lot of that foreign currency translation or benefit to the weaker dollar that we've had in the Capital Equipment Group, we're pretty diverse in terms of our manufacturing location, so we've gotten some benefit on the way up, but once again, it's the fundamentals that is going to drive that business.

Okay. Any estimation of year-end debt, did you already touch on that for year-end targets?

We mentioned in our first quarter call that we were anticipating a pay down in revolver debt by $20 million to $25 million. We cautioned that we are getting our arms around this foreign cash issue. I think that certainly we've made some progress on that front. I think that Jeff is helping us make more progress. So I think we'll stand by that for this moment. And as, certainly, Jeff gets his arms more around it, hopefully we'll be able to give a little bit better guidance on the third quarter call.

Very good. Are we still looking at a full year DNA of around $21 million and full year CapEx of $18 million?

Yes, approximately, yes.

And then, finally, I guess I'll throw this one to Eddie. Eddie, what are we looking at in terms of like innings of a baseball game, so to speak, with coming out of the -- I guess you might want to say the manufacturing contraction right now and maybe -- I know you've talked a lot about auto, but are you getting any feel, are we bottoming here and coming back up, but what does the crystal ball look like here?

Well, when you look across our broad base of involvement in supply tech, it would indicate that if we're -- we're so diversified, it would indicate that the economy is better than CNN will let you believe and we do not expect any further deterioration. I think hopefully supply tech is where it should be and as everyone gets their hands around this election and a lot of the issues, I personally believe that the American economy is doing very well and maybe we've just -- maybe we've hit the bottom and the other people are starting to come down and we're starting to go up. That would just be my global feeling about what's happening.

You know, I think Europe and other parts of the world are slowing down. We went through the little trough and we're stable now and we'll start back up. Hopefully that's true, but that would indicate that -- through our base of customers across the board and including Detroit. Can it get any darker? If it snowed 12 inches in the last six months, yes, it could snow another two inches, but we must be close to the bottom.

So I'm not saying you want to go on the offense here, but -- and incidentally, John, one thing is great about that capital equipment business, you can talk about the dollar up and down, but if you're drilling for gas and oil and you're buying diesel locomotives, you need the parts, okay? And whatever the price is, the price is at that particular time. So I think we're okay. Just, we're not on offense over here at Park-Ohio, but we're still playing defense pretty hard, but we think there's a chance here that things will start going the right direction.

I know you touched on it with Aluminum Products in the new quoting, but are you looking -- are you quoting some of the real, gasoline-effective cars and the hybrids? I'm not sure if Toyota, but I know GM is talking about it in '10 as far as the -- but without getting too much into you book or business, is the Aluminum Products side and the business quotations, can they be geared more towards the better mileage cars?

The -- we think the hottest engine -- the Chrysler platform is called the world engine. It's a 4 cylinder. When I talk about getting an order for $30 million, $35 million starting on January 1, that's on the world engine, okay?

Okay.

And the numbers we're hearing in volume on that engine are staggering. You know, they started 480,000 engines, now they're talking maybe 600,000 engines. So, yes, every time we receive an order, we immediately go and find out what car it's going to go on and that determines how interested we are, and the last two orders of any size we've written, one was on the world engine and one was on a -- the highest selling General Motors car as a part. So, yes, we're very aware of trying to move into platforms in cars and automobiles and trucks, because trucks are not going to go away. America is committed to that 150 or truck. The question is -- it will just be changed.

And actually, the more change there is, the lighter they try to make these vehicles, it comes right at us because it's aluminum and keep in mind, if they start dramatically changing the design of these things and the components of these things, and they have to buy all new tooling, when they go out to find people to make these parts, there's going to be fewer left. So, yes, I think we're in the right place and I'm anxious for them to close down certain platforms. I don't mind if they eliminate four of the platforms and concentrate on others because, let's have fewer cars, fewer designs, less selection, more volume in each particular platform and let's have fewer aluminum people that can make safety-critical parts. That's where we're going. And all you need is the auto industry to go there first.

That's -- that's a good projection. Let's hope we get there. All right. Thank you, gentlemen. Good quarter.

Thank you. Thank you.

Thank you. Our next question is coming from [Dirk Hayes] of [Maynard McCoy Asset Management].

Good morning. Hello.

Mr. Hayes, your line is live.

Can you hear me now?

Yes, we can. Yes, we can.

Sorry about that.

No problem.

It's Dirk Hayes from Maynard McCoy. The previous two times we reported quarterly results in March and May, you talked about forecast of diluted (inaudible) share between $2.10 and $2.25 for the full year, but in last night's release, there was no mention of guidance, so I'm just wondering if we should take that to mean the guidance is unchanged, you're placing it under review, revoking it or something else?

Dirk, this is Matt. I don't know if you were on the call at the beginning of the call, but I think we're very explicit in our confirmation of the guidance for 2008 of $2.10 to $2.25.

Okay. Yes, I came on a little bit late. Sorry about that.

No problem.

And I was just wondering how you plan on getting it to $2.10 or better? You've got $0.79 under your belt so far and I think in your queue you talk about the typical year, the second half is actually weaker than the first. So are you expecting some fresh tail winds to kick in or what -- how do you bridge those two?

Dirk, I'll take that. No, I think we -- we expect to make positive margin traction in all three of our businesses, candidly. I think Supply Technologies, as I commented earlier, is on the right track. We are focused very aggressively on our expenses here. We've made some changes in the earlier part of the year which we're only beginning to see on the expense and cost containment side. We have been able to pass through some of the inflationary costs from the -- via supply chain as was talked about earlier, not all of them, but we're getting some traction on that, so I think that we're seeing margin enhancement off that business from some pretty poor margin numbers. So I think we're expecting to see more of that in the second half.

I think that the casting business made huge progress quarter over quarter and we don't expect that to dissipate either and the Manufactured Products, we are optimistic, as we said for the second half. We believe as though we have the ability to mirror the performance in the first half and we're cautiously optimistic perhaps to do a little better, but that business has been very strong. I think when you couple that with some of the comments Jeff made about cost containment here at corporate, an SG&A line that moved significantly in the quarter and -- if you kind of think it through, we only have 10 million shares or 11.3 million shares, it only takes a few of those things to fall into place to have a lot of cents per share fall to the bottom line.

Very good. Thanks a lot and great quarter. Thanks, guys.

Thanks. Thank you.

Thank you. Our next question is a follow-up from Richard Paget of Morgan Joseph.

Just a little bit of a nuts and bolts question. You mentioned about the debt, the bank debt maybe getting paid down a bit more. Would that suggest, then, interest expense sequentially should drop a little bit more, there might be some seasonal uses of debt that might cause it to jump back up a bit?

Seasonally right now we're probably a little higher on working capital. We would expect cash flow improvement in the back half of the year, so, yes, we would expect seasonally to even see a further reduction of bank debt.

Okay. So maybe around $12 million for second half?

Are you asking on interest expense?

Yeah.

I don't know that we give specific guidance on interest expense.

Okay.

You're trying to trick the new guy, right?

All right. Well, I guess I can work the math out on my own.

Yeah.

Okay. But it should be lower from the first half, I guess would be the --

It should trend down, yes.

Okay. Thanks.

Thank you. We have no further questions at this time. I would like to turn the floor back over to Mr. Crawford.

Thank you, ladies and gentlemen and all the stakeholders of Park-Ohio. We'll continue to try to do a solid job over here and we'll see you at the end of the third quarter conference call. Thank you again.

Thank you. This does conclude today's Park-Ohio Holdings Corporation conference call.