Park Ohio Holdings Corp (PKOH) 2008 Q4 法說會逐字稿

Good morning and welcome to the 2008 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 the future results or events, there are a variety of factors that may materially change from the 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 2008 10-K to be filed with the SEC on March 16, 2009.

The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Additionally, the company may discuss EBITDA. EBITDA is the 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 beliefs 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 on their credit facilities to determine whether they may incur additional debt under such facilities.

For reconciliation from income before income tax to EBITDA please refer to the Company's current report on Form 8-K furnished on the SEC on March 10, 2009. Now the meeting will be turned over to Mr. Edward S. Crawford, Chairman and Chief Executive Officer. Gentlemen, you may begin.

Good morning, ladies and gentlemen. Welcome to the Park-Ohio annual review. I thought we would start today by having Jeff Rutherford, the CFO of the Company, address the unusual non-cash charges that are reflected in the press release in some detail. Then I will have Matt Crawford, the President and COO, address operations and I will try to give an overview or a peek into the future with our company. Jeff, why don't you begin by addressing the charges?

Thanks, Ed, and good morning, everyone. I think the best way to do this would be to do it by segment. We will run through the segments and what the restructuring and impairment charges are and also address the gains and the tax implications of those charges and gains.

Let's start with Supply Tech, the Supply Technologies segment. Due to the current depressed business cycle, which inherently results in higher discount rates and lower valuation models, we impaired $79.2 million of goodwill at Supply Tech. We do not believe this is indicative of the long-term intrinsic value of the operations, but based on the current accounting rules and specifically FASB 142 an impairment has been recorded.

Additionally we took a $5.8 million fixed asset impairment within Supply Technologies. This is for the auto fastener manufacturing operation within the segment and we impaired 50% of that equipment value based upon the current and near-term volume estimates.

There is also a restructuring charge that has been taken in the Supply Technologies segment. The total charge is going to be approximately $9 million. $7 million of this charge is being taken in the fourth quarter of '08. The remainder of the charge will be taken in the first quarter or first half of '09.

This restructuring charge is being taken to realign the distribution network for the loss of the Navistar business and to adjust to the current business cycle. $5 million of the charge is markdown of inventory. It should be noted that this inventory is already ineligible from our borrowing base and therefore that has no effect on our ability to borrow under our credit facilities. This markdown should assist in more timely conversion to cash of this inventory.

The remaining $4 million is for facility closures and mergers. There is a cash piece; $350,000 of the fourth quarter '08 charge is for severance. And the anticipated annual savings from this restructuring charge is -- this is on annual basis -- somewhere between $9 million and $10 million of cost avoidance.

In the Aluminum segment we impaired $16.5 million of goodwill for the same reason as the Supply Technologies impairment. As you may recall in the third quarter we took a fixed asset impairment charge at aluminum for $13.8 million. $0.6 million -- $600,000 of that is reversed in the fourth quarter as we disposed of assets that we had previously marked down.

In the Manufacturing segment there were no fourth-quarter charges. There was a third-quarter charge for a fixed asset impairment in the Rubber group within the Manufacturing segment. We did have gains in the fourth quarter as the holding company repurchased $11 million of notes, of industry's notes. We repurchased those notes at approximately 42%. After accounting for an appropriate write-off of deferred debt issuance costs, we recorded a net gain at the holding level of $6.2 million.

As I said, these notes are currently held at holdings and have not been contributed down to industries. Therefore when we record -- when we report the 10-K for Park-Ohio industries these notes will remain outstanding.

In the first quarter of '08 we did have a gain of $2.3 million related to the sale of property. You will see that reflected in the presentation also.

The tax implications of this get a little complicated. $30 million of the impaired goodwill has taxed basis and will be deductible in future periods. Therefore, when you think about the net effect of these charges and gains, if you take about a permanent [end] -- and I am going back to when I did taxes -- a permanent [end] of about $66 million. So the tax benefit associated with $102.4 million of net charges in the fourth quarter is the $13 million benefit. So the net charge in the fourth quarter is $89 million.

The $13 million benefit, less the current provision from operations of $1 million, plus the change in deferred tax asset or liabilities -- I am sorry, the deferred tax liability associated with the decline in our net pension asset. And I just want to make sure everyone understands that our pensions remain over funded, although we did have a decline in the assets associated with the pension. Bt that decline lowered our deferred tax liability and exposed the $33 million net deferred tax asset, which is probably more than anyone wanted to hear this morning about taxes. But the important piece of that is that we recorded a valuation allowance substantially equal to that exposed deferred tax asset of $32.7 million.

So for the fourth quarter the tax affected net charge net of gains and other taxes totaled $121.6 million. For the year it's $133.5 million. In the release we have presented in the segment information what the fourth quarter and full-year operations by segment were without these charges, gains, and before taxes. I will turn the call over to Matt to address those operating results.

Thanks, Jeff. Like so many other businesses our fourth quarter was marked by numerous unusual events. Certainly Jeff has covered a number on the accounting side; operations were no exception as well. The beginning of the quarter started quite strong. We were able to turn prior to all of the accounting changes and one-time non-cash charges, which Jeff has discussed. We were able to turn a nice profit.

Not where we had hoped to be for the fourth quarter, but we were able to do so largely because a number of our companies are still doing very well, still have strong backlogs. But at the same time, though, we definitely saw a slowing particularly in Automotive during the final weeks of the year.

In doing so and in seeing that and as we discussed on our third-quarter call, we sort of foreshadowed the need to address some of the business and economic climate changes with an aggressive plan to cut costs, look at the strategic business models in each of our businesses. In line with these assessments we have begun making changes -- aggressive changes I might add -- to customer relationships, vendor relationships, and operational profiles.

The changes that we are doing include exiting several low-margin customer relationships -- and we will talk about those, most notably Navistar -- the closure of several facilities, and the reduction of approximately 15% of our workforce while dropping compensation for most of the rest of those people who are still full-time. The good news is that we have, with the support of the entire Park-Ohio team, been able to make these changes without impacting our customers or making changes that would undercut the embedded long-term value of our business.

We are certain that even at a new era of slower or no economic growth we will exceed in returning to our track record of long-term profit improvement. I want to stress that although we have certainly seen some slowing in some of our end-markets, we continue to see strong backlogs in some of them and are doing quite well in those areas.

Looking at each segment -- the Supply Technologies segment first. Supply Tech sales weakened slightly from $127 million to approximately $122 million during the fourth quarter. The end-market performance was extremely volatile. Truck and bus actually showed an improvement year-over-year, largely from the sale of our remaining dedicated inventory to Navistar during the final exit from that agreement at the end of the year.

We also benefited from new business in the Electrical and Industrial Equipment segments. These improvements were offset, of course, by extremely weak automotive sales as well as commercial and residential construction segments.

Supply Tech EBIT was impacted seismically during the quarter and fell to $1.242 million from $6.755 million. The vast majority of this drop was due to, first, poor margins on the final exit sales of Navistar inventory, which sold well below our historical margin. And, secondly, lower volumes at several customers, Automotive especially, which exacerbated already difficult margin issues that we have talked about through those year where we had seen raw material increases from our vendors and not been able to pass them through and also absorption issues at some dedicated warehouse and assets we have in place for those customers.

As you can imagine, these are the accounts that we are looking closely at on how to move forward.

We are continuing to reshape Supply Tech with aggressive cost-cutting and repositioning with customers during the first quarter and expect that with any improved demand we will see immediate operational leverage.

Returning to the Aluminum Products segment. Gamco sales fell about 3.5% to $36 million during the quarter. This performance, while still behind expectations, was impressive considering the current auto production environment. We are continuing to invest very carefully in new opportunities as our competition falters, while we recognize that the recovery continues to be slow in this segment.

EBIT performance also fell from a loss of $265,000 last year to a loss of $1.467 million in the fourth quarter of '08. As we have discussed before, we continue to incur expenses associated with new business and the cost of underutilization associated with dropping volumes. We expect continued sluggish revenue throughout 2009 and have accordingly made additional cost cuts, including the closure of one additional casting facility.

Now looking at Manufactured Products. Manufactured Products' revenue increased almost 10% to $92 million. As we have discussed in the past, this business is typically -- or this business typically has relatively long lead times, six to nine months, and bookings had been brisk throughout most of 2008. Current booking activity has been sustained at these levels. While not quite as robust as last year at this time, the order mix has moved to smaller size orders. We expect that the global diversity of this business will help us stay strong, but this is not without risk in the current environment.

EBIT increased 22% as the business returned to more typical margins. Although we have been less aggressive cutting capacity in this segment, we continue to be vigilant in our cost reduction efforts in case we see sudden weakness in the locomotive, steel, or oil and gas market places.

Looking at the balance sheet, our total debt decreased during the fourth quarter almost $6 million, well behind our goal of $20 million to $25 million. This was mostly due to a build in inventory toward the final weeks of the year as business slowed down more than expected. We obviously anticipate that that will be addressed in the first and second quarter of this year.

As to our liquidity, the availability of our senior line of credit at the end of the quarter was roughly $50 million. Capital expenditure in the quarter were $1.7 million, well behind normal as we started focusing on generating cash. Cash taxes were $1.1 million.

In the closing, we are responding to the current environment as aggressively as possible without jeopardizing the strength of our businesses. While we expect to reap the benefits of the investments made during 2008, due to the current demand volatility it's impossible to figure out the timing of these revenues and earnings. Accordingly, we are not prepared to give guidance at this time. Thank you. Ed?

Thanks, Matt, Jeff. Just a couple thoughts. We are managing the Company -- I have been in manufacturing for over 50 years. I have never been through anything like this. I don't think anybody that is running a company has had the history to address the series of issues that continue to flow at the Company. But I will assure you that the management team here understands and is up to all of the responsibility and will take all of the actions to measure the we are going to come out of the end of this issue a stronger company.

We continue to take steps when necessary, but it's very important to not compromise the future. We have got some very good companies; this auto crisis has been deeper and longer than we expected. On the other hand, having this well-balanced world portfolio of activities has worked well for the Company.

So the goals are simple. We plan to have positive cash flow for this year. Secondly, we plan to meet all covenants, existing bank covenants and create earnings per share. But this is difficult times, we are up to it and we are managing it. The support of all of our -- every stakeholder, particularly employees responding to the changes we have made and what we have asked for has been outstanding.

I don't want to go into any detail, but all hands are on board and I am very excited about the cooperation. This is a team building experience. I just want to share that with all of you because that is the difference between us and a lot of other companies. We have got a culture here. We know how to win and we know how to get through a problem like this. When we come out the other side, we are going to be a better company.

Now I am ready to take any questions.

(Operator Instructions) Richard Paget, Morgan Joseph.

Hi, guys. In the quarter you guys did CapEx of $1.7 million, which as you said is a little bit behind the regular levels. Going into next year, just because it is part of the formula of some of your covenants, what would be reasonable for maintenance CapEx that we should assume? At least a range here.

It's hard to make any assumptions in our kinds of business, Richard. As we have mentioned sort of throughout the year, we have businesses that are still performing at a high level so we need to make investments to support those. But I do think that in a cash generation environment you can expect to see things more like what you saw in the fourth quarter.

Okay, so you could run your business on, let's call it $8 million maintenance CapEx throughout next year?

I think high single-digits is possible. Having said that, once again given the opportunity to support businesses that are performing awfully well for high ROI returns --. I am talking there is opportunities out there right now, Richard, that are three-month paybacks.

Right.

When we see those opportunities we are going to take them.

This is a top priority at the Company. We understand that that will affect the year. The level of approval here at the Company on any CapEx has been really strengthened. To get CapEx through this company other than maintenance is a special effort so we are really all over that. There is nothing that gets more attention or as much attention around here as spending CapEx in '09. So we understand the question and we are going to do a great job there.

Okay. Then on the interest expense, even though the total balance was down from last quarter, it looks like it bumped up in the fourth quarter. Was there some kind of one-time items in there?

There weren't any one-time items. Our bank line was a little higher than what we were forecasting originally. And as you factor in, for the holding level at least, going forward we are going to see a little bit of a decline due to the bond buyback.

Okay. Then with the Navistar impact, is there anyway you can quantify that in the fourth quarter, what the revenues were? Just so we can get a better sense of what the run rate could be going forward or at least a basis to work off of.

We can talk about what the total run rate was for Navistar and it was approximately $80 million. We anticipate that -- obviously that $80 million is gone. So that is why we took the costs out behind the loss of that contract.

The folks at Supply Technologies did a great job of getting in there and pulling out costs. We closed facilities, we have downsized facilities, and they are doing some merging of facilities. And that is where that $9 million to $10 million cost reduction comes from.

Richard, I think the important point here is it was on the operational earnings that had no impact to the fourth quarter. So I think that while certainly Jeff is correct in terms of the sales impact, although I would also indicate that we did not lose 100% of the business. There could be some residual sales in the first part of this year or perhaps through the whole year.

We are uncertain yet, but there is some opportunity. It's not much. So I think we could view them as completely gone, but with very little profit impact beyond the fourth quarter.

Richard, I would say that the disengagement of a company relationship that is 20 years plus and at the size was handled very well by both our customer and the Company. It's a difficult process but it ended on a very positive note. Where they have had some problems we have been helpful and they have paid all of their responsibilities and lived up to them and we lived up to our. So that is good. It didn't turn out to be unattractive; it turned out to be just a very good thing for our company.

Then in Supply Technologies, how are you guys seeing the new business pipeline? On one side of the coin maybe there is not a whole lot of business out there, but on the other side of the coin you guys are a way to cut costs. Have you had customers giving you more interest due to that factor?

Yes, we are definitely continuing to see a new business pipeline. There is no question, Richard. Everybody is trying to reduce cost and in general that is a good environment for people like that who sell that type of service.

So there is a lot of discussion. We have got some real, live opportunities and some things that we are trying to implement right now. The offset to that is people are awfully busy. Our customers are cutting staff; they are changing buyers. The guy you had a good relationship, one week he is there and the next week he is not. So it would be an extremely difficult year to predict what new sales level would be because of the volatility in personnel and also, I think, the cautiousness going on at the customer level relative to ensuring supply, etc.

But while we couldn't specifically give you a number in terms of expected new business dollars, there is a lot of activity.

Richard, another thought. Keep in mind, as you are very aware of, any new business especially in this size has to be front-end loaded. We have to come in with the buildup of the inventories and the investment to get in the business, okay? So when we really talk -- and there is a couple of possibilities of size.

It has really got to be priced right and it has got to be something that really works for us at this time. Because we don't really want to go and borrow a lot more money here to, in fact, take a chunk of business, the $20 million to $25 million, and have to front-end load it and get our money invested in it. Be there for three or four months before we get sales and revenues. Okay?

So this is something we are conscious of. We have been at this long enough to know that the relationship between getting the business and getting the revenues and the earnings. So we are being very, very careful to run a very tight ship here and not take any chances. So I think you would understand why we are in that mode.

Yes. And then getting on to the Aluminum Products business. Given the latest rounds of restructuring and what you have done to be business, what is the revenue run rate where you break even? Has that changed? I remember $200 million was a number a while back.

Well, the number has now moved down considerably. As we sit here today that number is in the $150 million range. We have done the things that -- and I have to say I review my story here I am kind of sticking to it. I keep talking about people leaving this business. I just can't tell you the number of quotations and the number of things that we have out there right now. The second-largest die casting company in our space just went bankrupt. I mean, there is business all over the place.

We have to be, again, very careful about taking on new business that has any CapEx [which its] period and secondly it has to be takeover business, not a business. And it has got to be things that fit in our equipment and our locations without any cost that generate revenue quickly. Again, we are running a very tight ship. We have got it screwed down.

We are just still amazed that the companies are actually still working off inventories. But a very encouraging thing about the auto industry, and I think this is something that you would probably be a little bit surprised to hear. Our major customers within the auto business, the Big Three and so forth, are still paying within terms.

You take Chrysler, for example. It's a major customer. They are still within terms on all of their contracts. One time during this whole slowdown they bumped it maybe a day or so forth, but our terms with those companies are 60 days. They continue to pay 60 days, so we have got them on a very, very tight leash. So our exposure dollar and cents to the auto industry has been dramatically reduced, dramatically reduced.

When this bumps back up, which it will --we can tell because we are a single-sourced in a lot of cases now -- and this starts to move quickly, we are going to be very, very careful about our terms and conditions until this thing is resolved. We have got this thing down, so we will have an EBITDA of some sort in that company. The question about it is how well will we do.

So we are fine there. We are where we wanted to be. I dreamed of having this much opportunity just get cars -- 6 million or 7 million cars and we will be off to the races. When you are sitting in there with 2 million or 3 million cars it doesn't work. But we will be back, we will be set. We just have to have the courage to stay here and be ready, and we are. But it's all discipline but the answer is $150 million we would be fine.

All right, thanks. I will get back in queue.

[John Baum].

How are you doing? Quick questions, I am not sure how much of this is to be answered on the conference call. But what is the interest rate on the revolver right now?

It's up to 150 basis points on new borrowings. That is the margin. Plus LIBOR.

Which LIBOR is that? Is that three month, one month?

It's usually three.

Three, okay. And getting back to the loan covenants. Is there a minimum amount of EBITDA before you trip a loan covenant?

Well, I mean, if you take a look at what the covenant equation is it's EBITDA less CapEx less taxes paid effectively over interest plus scheduled debt repayment. So it's formula based, so as we --

Is that kind of forty-ish? Can I work with that number or what? Like $40 million of EBITDA?

Well, it all depends on what CapEx and taxes paid. Taxes paid are normally going to run in that $7 million to $8 million range.

Okay. And cash CapEx this year you said you are kind of looking at annualized in the fourth quarter but it's kind of hard to figure out?

Yes, you would have to estimate your number based on what we have said.

Okay. And is there a balance sheet loan covenant either -- with the write-off of goodwill is there any concern that with the balance sheet being levered right now that that could trip a covenant?

No, no.

Okay. When you go through your fourth-quarter numbers, what are you looking for inventory turns this year? Is there a way to figure that out or do you have to break that out amongst all of the companies?

You would have to do that at the Company level.

John, that is really challenging because it also -- you are also trying to predict the when and if we get significant orders in our Capital Equipment group. Should we be so fortunate as to get a very high-margin technical long lead time job it could skew our inventory turns for a lot of good reasons.

Okay. Because in order to -- if you are going to manage working capital this year, obviously you want to try to extract as much as you can out of inventory. Would that be correct?

Absolutely and I think that one of the disappointments that we did not plan successfully on at the latter part of last year, those last few weeks, were a substantial reduction in the production requirements of our customers in Automotive and in Supply Tech. We got left holding the back on the balance sheet for some extra inventory. That will benefit us, as I mentioned in my comments, in the first half of the year.

I think we are in very good shape on those. But at the same time we are negotiating for some very, very large capital equipment jobs, which I will add often require significant down payments. So they are cash positive opportunities, but could cause us to carry extra inventory.

Do you have any -- is it too hard to figure out what any year-end '09 goals would be for debt pay down?

It is at this point, yes.

Can we anticipate that that is going to be a goal to pay down the revolver?

Yes, I think dad said in his comments that he is expecting to actually to draw off cash this year. I think we will. Clearly, we are going to have some opportunity and some wind at our back just based on the inventory numbers at the end of the year.

And then the swing on the revolving credit and the sub-notes. I am seeing that your goal there was to pay down 20. And I guess you paid down -- it was up 20, minus 12 on the sub-notes, so that is about eight. But there is about 28. Was that the anticipated build in the inventory?

Yes, that is correct.

Okay. I think that is all I have got. All right. Good luck, guys.

(Operator Instructions) [Michael Levine], BB&T.

Morning. Can you tell me if all the Navistar inventory is now gone?

Virtually all. As I mentioned in my comments, Michael -- this is Matt -- we did retain a small piece of the business. So while we certainly negotiated an exit agreement and discuss it in the context of it being all gone, if you are asking me if it's zero, it probably is not zero. But it went from lots of millions to a few hundred thousand.

Okay. But I guess my question is there is nothing else to be written off really?

No, in terms of Navistar we have cleaned it up completely. I would comment -- as we commented at the end of the third quarter call, we anticipated getting the lion's share, if not all, of our investment out and we did.

Okay. I think you made a comment about looking at low margin accounts and you mentioned Navistar was one of them. But it sounds like you are looking at others. Can you quantify that and, I mean, how much it might be?

I wouldn't want to do that at this point, Michael. I think the issue, obviously, is we are challenging the business model associated with customers which we have dedicated, whether it be manpower, whether it be facilities. We are looking closely at our fully-loaded ROIs on a customer by customer basis. We are going back to them and if we need price increases we are being very aggressive in trying to get them.

So it would be difficult for me to quantify risk associated with how those issues would resolve themselves in the future. But I certainly want everyone to know that we are addressing them aggressively.

And these are mostly in the Supply Tech area?

Across the board, but certainly the Supply Tech represents the area in which we are having the most conversations. At Gamco, clearly, we have been for a long time. Automotive has been challenging and as volumes have changed we have just automatically done that.

In the Manufacturer Product group actually business has been strong enough and that is enough of a -- on the large equipment scale that is more of a large job shop in terms of we make a custom piece of equipment to order. So, yes, I would characterize Supply Tech as being the most active in that area.

Okay. Lastly, you commented on payments from the Big Three. How about the Tier 1 auto guys? Are they paying on time and good payment terms?

Yes, let's put it this way -- this is Jeff Rutherford -- introduced a whole new intensity here, Mike. Yes, the answer is largely -- if they are not, we don't ship them. Just that simple.

We have our own established credit line where we have a contract for terms and conditions and delivery where we met it and they met it. And where we do not have but we have a self-imposed credit limit with all the Tier 1s. And we go to that limit and we are single-source, especially on the auto side there, we in fact just say you have to pay down to or we won't release the shipments.

We understand and our concern -- pretty optimistic about the final outcome of the auto industry. We are not getting deeper and deeper over the head with our customers. If they have got trouble, they have a credit limit and they pay us or we don't ship.

There are a couple there that we are bumping with them all the time. But it's pretty simple, if they want to continue to be in business, they need the product, they have to pay. If they don't wire transfer, we don't ship.

Okay, that is good management. Good. And can you tell me -- did you mention what the outstanding was on your revolver?

It was [164.6] at the end of the year.

Okay. So the availability was 50? Is that right?

Correct.

All right. That is it for me. Thanks very much.

At this time there are no audio questions.

Thank you, ladies and gentlemen. It's tough times but we have an eye on all of the stakeholders of the Company and we will continue to work very hard here. Again, as I started by saying we expect to get through this and have a better company in the end. We will get through it because we have got good people here at the organization and the culture to make this work for us. Thank you very much. Have a good day.

That concludes today's conference call. You may now disconnect.