Park Ohio Holdings Corp (PKOH) 2009 Q1 法說會逐字稿

Good morning, and welcome to the first quarter 2009 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 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 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 2008 10-K, filed with the SEC on March 16, 2009. 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 generally accepted accounting principles and 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 bids and because EBITDA is a measure use 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 10-K furnished to the SEC on May 8, 2009.

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.

Thank you very much for joining us and this first quarter conference call of 2009.

I will turn the presentation over to Matt Crawford, the President, and I will return at the end of the presentation to make a few comments as we look down the road toward the future of the Company.

Thank you very much.

We are all obviously disappointed with the first quarter results. The meltdown in the end market demand from virtually all end markets resulted in a 32% drop in revenue year-over-year, and despite a fantastic effort by our entire team to cut costs we incurred a loss of about $5.5 million or $0.50 per share versus a profit of $3.5 million or $0.30 per share a year ago.

It's impossible to over-emphasize the sacrifices made by all of the Park-Ohio team, and before discussing the end segment results, I want to extend my thanks for their leadership.

Now looking at Supply Technologies, revenue was down 36% for the quarter. Adjusted for the termination of our relationship with International Truck, Supply Tech was down 25%. With only a few exceptions, we saw less demand from all end markets which was partially offset by several bright spots of new business. While we expect that the depleted inventory levels at many of our customers will ultimately benefit our revenue streams we do not currently see signs of meaningful improvement.

EBIT was slightly negative as we focus on cost reduction to offset the rapid drop in our end market demand. Specifically, we, one, closed six branches and downsized three. Two, we reduced personnel by approximately 25%, and three, we reduced numerous other compensation and expense accounts.

These dramatic changes have been embraced by the Supply Technologies team, and we expect these changes will lead to immediate improvement and results and that the newer, leaner service model will allow Supply Tech to benefit substantially when volumes improve modestly.

Aluminum Products, revenue dropped 45% during the first quarter. EBIT was a loss of $3.8 million verses a loss of $1.1 million last year. We have reacted aggressively on the cost side of this business and expect improvement even at continued depressed sales levels. Our CEO will talk about this segment in his comments.

Manufactured Products revenue was down 22% versus last year. Our Industrial Equipment business, specifically, was hurt by the difficult events in the steel and other metal markets. With regard to new equipment orders, activity continues to be solid, but average order sizes are down as companies were focused on improving efficiencies rather than increasing capacity.

The Aftermarket business also suffered as some customers shuttered to conserve cash. We still believe the Aftermarket business is somewhat counter-cyclical and we believe that it is currently improving in this type of current demand. The Forge business continued to perform well, although revenue was slightly behind last year.

EBIT also came back to approximately $7.7 million from $13.2 million last year. Although margins came down due to less volume, it is notable that EBIT margins were still above 10%.

Looking at the balance sheet, total debt increased by $6.7 million during the first quarter. We expect to reverse this trend and generate cash as we address higher inventory levels throughout the year. The current availability in the line of credit is approximately $30 million. Cap Ex for the quarter was about $1.5 million. Cash taxes about $1.7 million.

In closing, the management team continues to focus on cost cutting and cash generation during this difficult period. We expect to benefit from these changes progressively throughout the rest of the year. We were in compliance with the bank agreement at the end of the first quarter and expect to stay in compliance for the second quarter.

Thank you very much.

Thanks, Matt.

Let me address and concentrate my comments on the one segment related to the auto industry. There is, of course, a lot of interest in the effects of Chrysler and General Motors activities and the other auto companies. Chrysler, as far as Park-Ohio and General Aluminum is considered, our division operating in that sector, our relationship with Chrysler, that would have been our largest customer. And simply ,we feel that we have very carefully tiptoed through the land mine as this company ultimately went into bankruptcy.

At risk here from the Company's viewpoint is somewhere less than $500,000. We are clearly a proprietary supplier. We thank Chrysler for that acknowledgement. There will be more difficult times ahead, but as far as from the Chrysler activities, there will not be any real major hit to the P&L or balance sheet, the sheet review point. And that's been very tricky and we all worked very hard on it with a lot of support from Chrysler. All indications are that if there is one good side of this, clearly we are on some major platforms, the mini-van, and the engines -- so the four cylinder, so we feel that sometime in July, first part of August, they will begin taking shipments and we'll be back in business with them.

It's a very painful, painful experience that we are going through in this sector. Again, with relationships that we have, we feel we are in a lot of the great platforms. Some the cars that will be eliminated, so forth, we haven't been hit by one of those, yet. Going forward, we are not optimistic, but we are playing the cards we are dealt, and at the end of this, again because of a diminishing supply base, I think we will have a good solid business going forward although it might be smaller. I think, particularly in light of the amount of the loss in that particular unit of $3.758 million against the big picture, the rest of the divisions are performing very well under the circumstances.

We feel that Supply Tech, there's not one single segment that's been hit. It's been across the board, which makes us comfortable because all indications are when the economy starts to adjust that unit will come back across the board.

It's not just one particular segment that's under pressure. It's just American manufacturing. I think Matt covered the Cap Ex adequately this morning.

I want to point out one more thing in this second sentence in my comment. We continue to adjust operating expenses and expect better performance in the second quarter.

Let me tell you why we think that we are going in the right direction. Keep in mind this Company, when you take a quarter, the fourth quarter, and then again in the first quarter, and this quarter you are talking about $86 million less in sales. Quarter-over-quarter, first quarter this year over first quarter of last year go back to the fourth quarter again approximately $80 million in loss and sales. So in two quarters, $160 million, roughly, has disappeared from the revenue side and we still feel we are in striking distance to accomplish our goals for '09.

To put this in staggering numbers that really reflects the support that we have with every level in the Company from the hourly employees, every stake holder, the steps we have taken in the fourth quarter/first quarter, effective coming in, but effective March 1st, we are talking about expenses over $4 million a month that have been taken out of this Company in that period -- $4 million.

Yes, we were reacting. We sense the marketplace. And we are doing what's necessary here. At this juncture we have had the support. We have done a lot of very strong things way ahead of maybe the crisis but we have the support of the operating people. We have the support even at the plant level. We are doing the things to make sure that we will be here in the future and that's what really hourly employees, people in the factory expect.

So we will continue to do what we have to to make sure this returns to profitability and work down the bank debt and concentrate on one thing called cash flow. At this time we are prepared to answer any questions. Thank you very much.

(Operator Instructions). Your first question comes from Richard Paget with Morgan Joseph.

Good morning, guys.

How are you today?

Not bad. I wondered if you could let us know if there were any kind of one time charges or expenses in the numbers there? I know you are restructuring and closing some plants. Anything that to give us a better idea at these revenue run rates, what kind of normalized margins would be?

This is Jeff Rutherford. No, we didn't have one time charges in the first quarter.

Okay. And then just generally speaking, how are orders -- I guess, what's the trend? Do you think we reached the bottom yet? Have some of your customers have better sentiment going forward that, okay, maybe we don't have to get into cash conservation mode and activity is starting to pick up at all?

This is Matt, Richard. No. As I said in my comments, I think that obviously auto speaks for itself.

Relative to Supply Technology, which has an extremely broad look at the economy as you know, we were -- we are fairly bearish relative to what's going on out there currently and are continuing to cut expenses that would lead us to believe that we are not seeing a current period improvement.

As far as the auto industry I would like to answer that thought. Apparently the government is in the business of now picking winners and losers in the auto industry and then people are left in the auto industries are picking winners and losers in the supply base.

We think we are positioned well there, relative to being a company that will be part of the future.

Okay, then on the Manufactured Product side. Even Aftermarket, how long can they defer buying new parts, if they are not going to be buying full new systems?

As I said in my comes, that is one area where we are seeing a current period uptick and we anticipate the Aftermarket -- I think it was a relatively unusual event to see both new equipment orders of size and Aftermarket go down at the same time, especially as aggressively as they both did.

It's really of no surprise that we are beginning to see some activity on the Aftermarket side.

Richard, I was in a plant recently on the AK Jacks/Taco side and where major customers, world class customers historically would send in certain of their equipment to be refurbished every six months -- the pots and so forth. They are dragging those out to the last hour so they can run it.

All the maintenance and everything else, anybody is trying to reduce Cap Ex across the board is holding back all of the repairs and everything else until the last conceivable moment.

What that says is when this economy starts up, everyone will be caught flatfooted with their spares and everything else and there will be an incredible jump, particularly in the aftermarket and sales and service in the manufacturing goods.

And then on that same topic, your guys Cap Ex was pretty low for the quarter. How long can you keep it at levels like that and what should we kind of expect going forward?

Yes, I would expect we are trying to conserve cash, and we are trying to be very prudent in terms of the ROIs we expect on any new business. We are seeing some interesting opportunities, but they are rare in terms of where we would spend cash at this point. I expect it to be very similar on a quarterly basis going forward for the rest of the year.

And then maybe Jeff, just real quick on the tax rate. What was going on there in the quarter and then maybe if shall we continue to expect the typical 36% going forward?

The tax provision in the first quarter was for foreign taxes. And we will expect to see that similar number in the second quarter, but for a study state with profitable pre-tax, we would expect a rate around 36%.

Okay, thanks. I will get back in queue for now.

Thank you.

Your next question comes from Doug Ruth with Linux Financial Services.

Good morning. Is there any conversation with the banker about renewing the bank revolver?

Matt, really is more -- I'm in more in the operations these days. I think Matt and Jeff are particularly involved with the banks. Matt, why don't you comment on that.

Sure. We continue, as you would expect in this environment, to have relatively active discussions with our bank group. As I'm sure you are aware, our current deal does not end until the end of 2010.

In this environment we think it's prudent to continue to have that dialogue on all fronts.

Okay. Do you have a lot of confidence you will be able to renew the revolver?

Well, as I stated, it's a little bit premature at this point since we are 18 or so months away from the maturity. Certainly it's a challenging credit environment and we will do the best we can.

Okay. And do we have an inventory goal for 2009?

We do. We are looking -- and we look at it more, Doug, from an own inventory perspective of inventory-less payables, and our expectation is that we will have a meaningful reduction in our net inventory investment. And meaningful for us would be somewhere in that $20 million range.

Okay. Would you expect to see some improvement during the second quarter in inventory?

We had improvement in inventory in the first quarter. We lost it on the leverage side. We need to get that right side and we need to get that leverage back. We would anticipate over the coming months that we will reverse that trend and see an improvement in our own inventory.

You know, one of the -- one of the competitive strengths of the Company which is hard for people on the outside looking in to see is to really appreciate the value of the assets. They are pretty depreciated. Could you give us a sense of what some of these assets might really be worth?

Doug, I don't think we talk about the true value of the assets. I think we all know inherently that the operations we own have greater value than possibly are reflected in our enterprise value. But I don't think we are prepared to talk about individual values of those operations.

I think -- this is Matt speaking. I think, particularly in this environment, it would be very difficult to try and judge those.

Okay. And is it possible, has the Company considered putting mortgages on some of the properties? Would that be a solution to lengthen the maturity of some of the debt?

Well, essentially, in our bank agreement, which is an asset-based facility for industries, for industries domestic which domestic defined as North American, so it's U.S., and Canada, those facilities, that real estate is effectively mortgaged by the banks.

I see. Okay. Thank you for answering my questions.

Thank you.

Your next question comes from Michael Levine with BB&T.

Good morning.

Good morning, Mike. How you doing?

Good, thanks. How are you? I guess I want to ask more about the shutdowns. I can appreciate you don't have a receivable problem with Chrysler. Chrysler shutting down their manufacturing facility. GM has talked about extending some of their shutdowns. And I have to imagine how difficult that is to deal with. I know you are cutting costs.

How much of an effect will that have on you and can you cut enough costs or do you have to just trim, survive through the summer and hope for better times when production picks up?

Well, planning for the crisis that exists today, you have to go back six or seven months. What we are doing is a long pattern of adjustments for this.

No, I didn't think Chrysler was going to go bankrupt, quite frankly, but I did anticipate a maker slowdown in the first and second quarter because it was clear that there were a lot of vehicles being stacked up all over the place in the dealerships. Ultimately, when you run ahead as they did, you are going to pay the price later. The steps we have been taking through that are steps that were planned.

As we look at this, which is a very bleak picture that Chrysler is not going to take any shipments, doors are shut down to the middle of July or when they say they exit this bankruptcy. But I will tell you there are some exceptions in the Chrysler in which they will be taking profits, although small as it will be.

What's interesting here is when I talk about the dramatic reduction in cost per month, a lot of that is in the Aluminum business because that's the one that hurt us the most. In particularly in the first quarter. So late in the first quarter it was real that this was going to be a real meltdown way beyond what we anticipated. And we were hoping to get a car built this year of $9 million, $10 million, it will be less than that.

But clearly, one, as far as dealing with our customers, particularly Chrysler and GM we are in a lot of very good platforms. That was considered when we took the business and spending Cap Ex to take platforms, for example the four cylinder engine at Chrysler, it's not a mistake that we have the large latter frame on that.

There's no short-term answer. The answer is, yes. Just have to keep the level on the cost and we will and I think hopefully you will see the changes we have made in the second quarter over the first quarter. A lot of work being done every day here. And I don't know if it's fortunate or unfortunate.

I have been through this before. You have to go back to what I call, Cliff One in 2000 when the world started to shake and then one, two and three we were able to get through that crisis by flattening the Company out at $624 million in sales. Increasing prices on people that the business was marginal and reacting to lots of problems. Maybe not -- it doesn't appear to be the same type of crisis.

As far as I'm concerned it is. The Company went down $200 million in sales in that period of time per year and we have a smaller Company today. We're not a battleship any more. We are running at a run rate of $750 million - $800 million. We are running the Company differently.

Our plan is to get through this auto cries. The one thing is a fact that supply base has decimated here. They have a number of people that are in this space when this auto industry starts back up is just going to be amazing. I know this because there is never more activity about new work and transfer work than exists right now. This is clearly, you can't win if you aren't in the game and kind of being the last of the Mohicans.

There is no other answer other than control, understanding what you are dealing with and quite frankly it is all about costs, cost reductions and that's how you have to fight this battle.

Okay. Say, Matt, you commented about manufactured products that the orders are still good but they are smaller. How do we -- like how much smaller on a percentage basis? And how is that working into your back log?

Well, that's an interesting point. It would be hard for me to configure on a percentage basis. I think that the percentage of new business to Aftermarket has held up, being, which we aim for 50/50. The problem is they've slowed on both sides.

No, I think that there is a meaningful difference when you are not receiving. In the past we've had orders that have been $10 million, $15 million, $25 million orders. The extent that those orders are not occurring as rapidly as they once were, it is a dramatic shift in the average order size.

There is no question that it hurt the business in the first quarter and it is more challenging to develop backlogs that in revenue dollars there are going to be the equivalent of the prior year.

Can you give us an indication of what your backlog looks like versus last quarter.

I'm pausing because, once again, one of the other difficult things that's going on right now is we are seeing a greater risk to the pushout or cancellations of orders. So I am not as comfortable as I sit here today that I was in the past that the backlog numbers are solid as they once were.

We continue to build backlog. The backlogs would indicate that there is plenty of business out there and we will have to adjust our costs and we have been adjusting our costs and we've continued to see an EBIT margin as I mentioned above 10%.

We can be successful at a lower, slower run rate, but I would be cautious at this point projecting a backlog number when I think there is greater risk than there has been in the past of either pushout or cancellations.

Okay. Okay. Thanks. And then lastly can you just remind us what the critical compliance covenants are in your bank agreement and, I don't know. Can you tell us what the actual versus the target is?

Well, I can tell you what the covenant is and the covenant is effectively EBITDA less Cap Ex less cash taxes over paid interest plus scheduled principle pay down which is effectively the amortization of the M and E tranche of our bank agreement. And the covenant is one to one.

And do you tell us where you are or what the actual was for the quarter?

We haven't. But you -- when you pick up our quarter, you can do the calculation.

Okay. Okay. And is that something -- I know you said you are going to be in compliance next quarter. In your discussions with the banks, are you discussing covenant relief also for later in the year? Or for your renewed agreement?

Yes. I wouldn't be more comfortable than the comments that we've already made about expecting to be in compliance and that we maintain an active discussion with the banks on multiple levels.

Okay. Thank you, guys.

(Operator Instructions). And your next question comes from Matt Vittorioso with Barclays Capital.

Thank you. Most of my questions have been asked. Just wondering if you could give -- I guess you talked about a reduction in inventory and sort of a goal of $20 million. Is that how we should be think being free cash flow over the balance of this year, driving working capital down in that sort of $20 million range is there any other color you can give on the free cash flow side?

No, I think that's it. That's a goal we have with the decline in the business. Our expectation is that on the inventory side we will take commensurate amount of investment out.

Okay. And just kind of a high level question. Have you provided what the break down in Aluminum Supply is or the Auto segment there as far as the big three exposure?

Balance sheet exposure?

No, just like what percentage of the sales are made up by some of these auto companies?

Well, we have indicated in the past a number around 20%. Obviously that number is a little bit less as the revenue numbers come down more quickly than the rest of the business.

Okay. Thank you.

Your next question comes from John Baum, a Private Investor.

Good morning, guts, how you doing?

Hey, John, how you doing?

Good, good. Again, most of these questions have been answered. I think real quickly, what cash taxes paid for the first quarter?

Tax -- hang on a second. $1.7 million.

Okay. And what was cash interest? I didn't get the -- I don't think the sources and uses have been posted yet. Cash interest?

Yes, it was low. $1.5 million.

Are you able to juggle that? I think when I went back last year in the queue, it looked like you were able to bump first quarter cash taxes it looks like you doubled up in the second quarter. Is that where the balance is going to be due? Kind of a double payment in the second quarter?

On taxes?

Cash interest.

We have a bond payment that's due in the second quarter.

Got it. Okay. And did you say cash Cap Ex in the first quarter was 1.5?

Yes, approximately $1.5 million.

And full year was it I know you didn't give an exact number but it was -- can we annualize that figure and kind of work from there?

I think for now that's fair.

Okay, Eddie, this is directed to you. I see a lot of Ford Flex vehicles on the road right now. Are you doing quoting right now with Ford? Some of their new builds. What's happening when we get away from Chrysler and GM?

Well, again to my earlier comments, the takeover work across the board including Ford particularly as their supply base and one major company that they have had as supplier for many, many years just was chaptered a week ago, and I think it's one of their largest suppliers in our particular business. We are seeing even more activity from that particular company than we anticipated and also quite frankly there are a lot more activity with the transplants rather than locking in ongoing relationships with domestic suppliers.

There is a lot of strange things happening, relative to, particularly, access to the transplants and their interest in for some reason some dynamics happening in here that would indicate that they would like to increase the supply base in America which is a good thing. Ford, particularly, is very active now. But again what I call takeover work is in the middle of a contract and the question is how much Cap Ex goes with taking the business? How long is left on the platform? What's the volume of that going to be?

And we are not interested in taking on projects that are not already in our current capabilities within the plants and the equipment we have. We do not want to step out and be involved in due processes and projects in which, yes, you get an order for $15 million a year for three years and it's done in two years and you have to put up $1.4 million -- this is an order offered to us and we said no. We are not going spend $1.4 million to take on business for two and a half years, particularly at the price they are talking about.

We will end up doing more business with Ford in '10 than we did in '08, '09 just by the nature of the diminishing supply base.

Okay. There is anyway -- are you handy? This gets a broader question in the news all the time.

Anyway a handicap right now whether what it looks like in the next six months? Will Ford be the survivor and if the Fiat deal goes through with Chrysler. I don't want to get involved with headlines, but do you work with that? Or how much visibility do you have when you go six to eight months on quoting on this?

Well, my personal opinion is just now that the UAW owns half of Chrysler, I think it will be going forward. And I would imagine that sounds like they will going to own half of General Motors. We have a new partner and very interested how a visible politically active group just took over the auto industry. I think we were going forward on all fronts.

You get advantage of the tele-facility at all? When you look at some of the receivables that are listed on the Chrysler bankruptcy you see Cummins Engine there and Johnson Controls and some of their receivables have been guaranteed by one of the government's credit facilities. Are you a derivative beneficiary of that?

Yes, we're directly tied into the government sponsored program through Citibank in which we get paid in the future or currently from Chrysler. I think it's in ten days.

I see, so that will be an element of good news.

Well, it's quite interesting because they invited certain suppliers into the program. And ignored others. We have been invited into all those programs. No, we will play this week by week and -- I go around on the weekends and look at the dealer's lots and see if I count the cars and come back the following weekend and there are less cars I feel good.

I guess that's the state of the auto industry right now. Highly interesting. Jeff, I think this question was asked you before. I know when I read in the K they said there were restructuring charges that were going to drag into the first quarter and I think your responses were, "there wasn't any in the $.50 loss.

Is it just because they are deemed to be operational? You mean your restructural was written off in the fourth quarter? There wasn't anything dragging into the first?

We anticipated some cost coming through relative to some distribution side closings. They didn't happen in the first quarter.

Could that still be available? Could that still be hitting the second? Or just kind of wound through operational? Or just kind of wound through operational?

It could. But none of the charges were taken in the first quarter.

Got it. Okay. Let's see. I guess Eddie, I know in your -- without getting into guidance right here, you said you expect improved results. Doesn't sound like we are seeing too much in the top line.

Is the guidance here such that it is more that we will be looking for expense savings?

Well, wherever it comes from, John, I'm going to be happy. Maybe it doesn't make a difference with the revenue side or from the cost side, it's just we expect to do better in the second quarter and it's an extension of good fortune and maybe little wind in your back and maybe we will sale few extra cars. More important in an atmosphere like this you have to control the operating expenses and keep the company in position to go forward when things can get better.

And finally, over like what do you see in overseas. Can you give a quick either Europe or China, is there any color as far as sales overseas?

I will answer that and then I would like to wrap this up. You know, it's not that the interest in quoting changes. It is still robust. But the difference between quotes today, in my opinion, are a little bit different than they were a year or two years ago because there are project that are going to happen.

We see something and we like to look at it and we quote on it, but the difference between getting the quote and the close time and order time and deposit time, and everyone is in the world in every major project just like we are but the auto industry.

Everyone is frozen worldwide here trying to figure out where to go next. And so you can't get discouraged because you are not booking these orders right now. You get discouraged when your phone is not ringing. Get discouraged when you aren't quoting. Just a longer period and everyone is waiting until the last minute to really say go. That's what's frustrating.

If there is any visibility across -- and we have a diverse company particularly when you look at Supply Technology. When you look at our customers and see like in neutral, it just -- we just have to be more patient and run the business. And I wish there were more concrete things we could say. I wish we are not in anyway appearing vague, we are just running the company based on the facts we have today and we were living day to day. This is no grand planning around here.

It's just survival and making sure the company is ready to go, just like we did in '01, '02, and '03. We are right back to the same thing and we cut it down in '00. We had it run in '01-'02 and '03. Then after '01, '02, and '03, when the economy got behind us everyone knows the results and how we grew the company. We are in the same period, right now, we're in idle. We can't get hurt.

And I thank you for your questions and, ladies and gentlemen, and all of the stake holders and everyone here at the company, particularly, all of our employees, right down to the plant level, are all on the same team, and we are going to keep doing what's necessary to make sure we are ready for the future. We thank you and we look forward to re-convening at the end of the second quarter.

Thank you. This concludes today's conference call. You may now disconnect.