Park Ohio Holdings Corp (PKOH) 2009 Q3 法說會逐字稿

Good morning and welcome to the 2009 third-quarter results conference call.

At this time, all participants are in a listen-only mode. After the presentation, the Company will conduct a question-and-answer session. Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

Before the conference call begins, please remember that the Company will be discussing some issues that are historical and some issues that are forward-looking. When the Company speaks about future results or events, there are a variety of factors that may materially change their actual results from those projected. A list of relevant factors may be found in the earnings press release as well as in the Company's 2008 10-K filed with 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 not a measure of performance under Generally Accepted Accounting Principles and is considered a non-GAAP financial measure as defined by the SEC. The Company might 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 reconciliations for income before taxes to EBITDA, please refer to the Company's report current report on Form 8-K furnished to the SEC on November 3, 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. Welcome to the Park-Ohio third-quarter conference call. I have with me Jeff Rutherford, the CFO of the Company, who will be available later to answer any questions. I've asked the President of the Company, Matt Crawford, to begin the review of the third-quarter results.

Great, thank you very much.

Total revenue for the quarter was down about 36.6% year-over-year to $169 million, due to ongoing revenue softness in all three segments. Sequentially though, revenue was up 3% from the second quarter, showing some signs of modest improvement in a few end markets, most notably auto.

EBIT declined to just under $3 million from a loss of $6.9 million or a profit of $11.2 million before restructuring costs a year ago.

Earnings-per-share was a loss of $0.29 versus a loss of $0.82 last year or a profit of $0.24 before restructuring charges a year ago.

Looking at the individual units, Supply Technologies revenue was down 37% to $82.5 million during the quarter, but sequential growth was up 5%. Although most end markets were considerably softer year-over-year, results compared to the second-quarter revenue showed mixed end market demand trends with some signs of improvement.

EBIT was just north of $2 million, versus $5.3 million last year and about $2.9 million sequentially. We continue to expect that, as revenue improves, we should see solid margin growth.

Our Aluminum Products business, our casting business saw a decrease in revenue of 11.5% year-over-year to almost $32 million. More notably though, revenue expanded 46% sequentially from the second quarter, which represents an improving auto market combined with increased new business opportunities.

EBIT, adjusted for restructuring and after one-time expenses, including the Metaldyne accounts receivable write-off, increased from an adjusted loss of $3.8 million to just under a $500,000 profit.

Manufactured Products revenue was down 45% to $54.5 million during the quarter. As previewed during the second-quarter conference call, the third quarter was particularly challenging due to soft demand for new equipment. We expect and have seen some evidence of some brightening on the global manufacturing front that will help begin to rebuild our backlog.

EBIT was $3.4 million, down from $10 million during the third quarter last year. This reduction was due primarily to lower absorption throughout our manufacturing process, as well as a shift towards lower-margin product. While significant expense reductions were incurred, we made the conscious decision to retain capacity as we look to the future.

Looking at the balance sheet, total debt was down about $24 million during the quarter, and availability under the line of credit was just over $30 million. CapEx was $4.6 million through September. We still expect CapEx to stay below $7 million for 2009. Cash taxes were about $300,000.

In closing, although we are beginning to see some signs of improving demand environment, we now believe it will be difficult to meet our prior goal of being profitable for calendar 2009.

With that, I will turn it over to our -- back to our Chairman and CEO, Ed Crawford.

Thanks, Matt. Well, clearly, the third quarter was a very difficult period. When I look back at the last 12 months, our goal going into this compression was to make sure that, when it turned, we had a stronger, better company for the future.

I liken the current circumstances -- if you go back and you've been a stakeholder in the company going through what I call the cliff, the small mini melt down of 2001/2002/2003, and when the economy began to improve, we had a better Company. The Company went on to post over $375 million of EBITDA in the next five years. Growth was really, really very strong.

So I know it is disappointing. I am disappointed; we all are disappointed. But as stakeholders in the Company, we have three divisions. Aluminum is very, very well prepared for the future. I think the change in the direction and the future of the aluminum business in the last two quarters hopefully will be impressive. That looks like it's in place, well prepared again for the upturn.

Supply Technology as always will follow the economy -- very, very broad-based. Again, our capital equipment business -- I can't be too disappointed that this business, which is all around oil and gas exploration and steel companies, that when this economy really broke at the end of October, end of last year, they stopped CapEx, very much like our company. So we are not surprised that CapEx spending went to virtually 0.

But just like in our Company, we realize and understand, especially big capital projects like gas and oil, they might be held back for a couple of years but they are there; they are in the backlog, not in our Company at the moment but in the pipeline. We feel that, as we convert to more service business and more parts business, the tale of that particular [goal] will be good for the Company.

So again, the goal was to get through the year. First, most important in that particular effort was to make sure under no circumstances we were to get in any issues with our bond or our particularly bank covenants, which we accomplished. That was accomplished by running a very, very tight company, under control, preparing it for the future. When I think of paying down debt, $30 million since the beginning of the year, and I think about in the third quarter, free cash flow, $25 million, this is what this Company is all about. We can manage ourselves in a downturn and as I indicated, I think things are looking better for us and we are trying to, again, prepare the Company for any increase in volume. When that arrives, we have a better stronger Company than we had going in.

So this is not broken. We have not lost any key customers, any key employees. We're building a base. Hopefully, all of us will be the benefactors of that in the future.

So I am now prepared to answer questions.

(Operator Instructions). Richard Paget, Morgan Joseph.

I wondered if we could talk a little bit more in depth in the various segments about sequential margin trends. Starting off with Supply Technologies, revenues were up sequentially but margins were down sequentially, so I wondered if you could give us what the various levers on that, that impacted that, and then go through the same exercise with Manufactured Products.

Richard, this is Jeff Rutherford. I'll start with Supply Technologies. What we have in Supply Technologies are a couple of things going on. Number one is the mix of product sales and also what I would include in that would be new business, which always starts out a little bit lower margin as it ramps. So that has affected the margin a little bit.

Also, we had then favorable benefits in the second quarter which were disclosed in the Q in the second quarter, and that was not repeated in the third quarter. That affected our margin sequentially, second to third quarter also.

Richard, it's Matt. Yes, we feel as though incremental margins, incremental business there and demand will fundamentally help margins over the long-term. We didn't see as much of it as we would've liked in the second quarter, for the reasons Jeff mentioned, but I don't think that's a setback in our belief that the underlying margins are going in the right direction.

Relative to the other two segments, well, General Aluminum speaks for itself. I mean margins did improve there. I gave the adjusted numbers. Although the margins aren't where we want them to be at this point, the business is profitable on an adjusted basis. That's where we are hoping to be. So that one kind of speaks for itself; it's going in the right direction.

Manufactured Products -- as I mentioned in my comments, we made the conscious -- we knew this was coming; we commented in the second quarter that the lack of order book activity in sort of call it April/May/June was going to have a significant effect on business, on new equipment business in the third quarter. It did.

We could have been more aggressive in terms of cost cutting, but we believe that the dearth of new equipment orders was relatively temporary, so we chose to not cut as deep as we might have otherwise if we thought that we were facing a couple more years of this.

So those margins obviously are not where we would like them to be and not indicative of I think what the business should do, but candidly, to still perform at a high single-digit operating margin, given the catastrophic environment on new equipment, was fairly impressive.

So is most of the margin decline having to do with under-absorption of overhead, or have you had to give up some pricing?

I mean, a little bit of both. Candidly, there's no question that, when you're looking for business, you are casting your net a little wider, maybe on some types of equipment that we might normally not have pursued because it is lower-margin. Clearly, on good equipment orders, we are being a little bit more aggressive, to make sure we get it. There just isn't much out there. When you are fighting for scraps, you've got to be aggressive. So there's no question that that's part of it.

Then as I mentioned, under-absorption from a manufacturing perspective, an engineering perspective, you name it, was an issue as well. So for that particular business segment, it was a perfect storm.

We saw it coming. I mean, I know we foreshadowed this in the second-quarter call, so I don't want -- no one should think it caught us off-guard. It is just a perfect storm for that business.

Okay. Then you mentioned, in Supply Technologies, there were some markets where you did see strengthening demand. Could you be more specific on what is good out there?

Yes, are you thinking sequentially? Is that sort of your thinking or what do you (multiple speakers)?

Well, yes, I mean in your prepared remarks, you had said that we saw pockets of strength, so I just wonder what specifically those areas are.

Yes, you know, it's hard. I mean, once again, I know there's a big debate going on in the marketplace on what is just filling the inventory chain again versus real demand. So, not differentiating between either, we did see some incremental demand in semiconductor which has picked up, but I think you've seen that in the marketplace. We did see some incremental in auto, obviously, so there were some opportunities. I know that we saw some in construction, sort of agriculture and construction, guys like Deere and so forth, Caterpillar. So we are seeing some pockets, but there were some that were sequentially down, too. So that's what I made in my comments; they're a little bit of a mixed bag. On a net basis, we are up a little bit but it was certainly a mixed bag in the quarter.

Richard, this is Eddie. I want to -- what I found interesting about this, sales for the first nine months in Supply Technologies were down 39%. In the quarter, we're talking about they were down 37%.

One of the things that could be very well going on here -- and we've added new business, but I think everyone, all of the companies, all of the manufacturing companies are -- they are doing everything they can to reduce their inventories, okay? No one wants to go into 2009 with more inventories on-hand. So they've run it down; they've run us down.

Quite frankly, in the supply line, across such a base, if you're not contracting any further, which I don't think we are, you might be at the bottom. I'm concerned, very concerned, if there's any movement in the inventories or any movement in the economy across the board, the rush to fill those holes is very deep. So it is a concern to me that in the -- this affects the margins. We are carrying the minimum amount of overhead we can. We've restructured the Company. Any burp or any movement in volume of any type will really dramatically -- and then you will see the margins we are all optimistic about. But you've got to look at this as a company that supplies hundreds of hundreds of world-class manufacturing companies that are all sitting there saying get your inventory down to 0.

So quite frankly, holding where we are in the third quarter is only a result of really writing some new business. So, I think we're going to have, when this moves -- and it doesn't have to move very much -- and they start replenishing their inventories. Forget the throughput to their customers, they have to get prepared to service the customers in 2010. And right now, they decided in the third and fourth quarter to sit it out. But I don't think there's any further deterioration in this particular segment when I think of revenue and subsequently margins.

Okay. Then Jeff, maybe a little housekeeping -- so I just want to be clear that the bankruptcy reserve of $2.1 million, is that all in Aluminum or did some trickle into the other?

That's all in Aluminum. That's for one customer in particular.

Okay so that's all metal done then?

Yes.

Then just going forward, how should we think about the tax rate?

(laughter) Yes. You know, obviously we are in a very odd position. Our tax provision is for our foreign tax payments. That will continue into the fourth quarter.

Right.

We are looking at, for the entire year, a total provision of somewhere just south of a $3 million tax provision, and that is effectively all foreign tax payment.

Going forward, obviously, when we return to consolidated profitability, we will be looking at a more reasonable tax provision, somewhere in that 39%, 38.5% to 39%.

Okay, great. I'll get back in the queue.

What's happening now is we are not getting any -- we are not recording any tax benefit for domestic losses.

Matt Vittorioso, Barclays Capital.

Good morning. I was wondering if you could just talk about the strong free cash flow in the quarter. Was that primarily a function of reducing working capital, or if you could just talk about the components there?

Yes, you'll see, on the balance sheet, what we did in the second quarter. We've reduced inventory down below $200 million. We've picked up a little bit of leverage in Accounts Payable. That's what is generating the cash flow.

Okay. You use that cash to pay down revolver borrowings? Is that what you did?

Domestic cash is used to pay down the US bank agreement and then international cash is what is sitting, basically what sitting in cash on the balance sheet. We've used that on occasion. When the market is right, we've bought back bonds with that cash.

What is your ability to continue to buy back bonds? Is there a certain amount of a basket that permits you to do that?

Richard, this is Matt talking. Yes, our financial condition is not in such a place that that is a core strategy of ours, obviously. So I think that there has been a time and place but I don't --

So you have some left but it's clearly not at the forefront of your cash deployment strategy, I suppose.

Well, remember, a lot of this cash -- Jeff commented about this cash being foreign but that money is needed to (inaudible) businesses, so I'm not suggesting that we would take that strategy off the table completely, but it's not as though we are awash in cash here.

Also -- this is Eddie Crawford -- it's important, as we look into refinancing, it's important that we continue to pay debt down as one of the core strategies of the Company.

Makes sense, yes. Lastly from me, you talked about sort of clearing the way as far as bank agreement covenants and bond covenants. Could you just kind of refresh us on where you stand? I think the one that was on my mind was the 1.1X6 coverage ratio. Where do you stand versus that covenant today? Are there any other that are kind of critical?

Well, the main financial covenant is the debt service coverage ratio from the bank agreement. We are going to report third quarter -- that's going to be approximately 1.5. The covenant is 1.0, a given quarter 1.1 to consecutive quarter.

Okay. That is the primary covenant that you have to remain in compliance with?

That's correct.

Doug Ruth, Lenox Financial.

Could you talk some about the talks with the bank in renewing the bank revolver, and where you might be at with that?

Doug, this is Matt. How are you? Yes, I think, as we've commented on prior calls, we are in ongoing discussions and negotiations with the banks. Our bank deal, as you may know, matures at the end of next year, so we are in constant discussions with them.

Are you optimistic that something might happen yet this year, or do you think it would roll into 2010?

I think it's more likely, at this point, something in 2010. You know, I don't have to tell -- I suspect I don't have to tell you it is a choppy bank market, and it is at the top of our agenda.

Okay. What about -- can you talk a little bit more about inventory and inventory goals as far as, you know, tremendous free cash flow for the quarter. Congratulations on that. Could we expect to see more improvement in inventory in the fourth quarter?

Doug, it is Jeff. As you can imagine, because it's more difficult, as we move into the fourth quarter and we think about the business growing, there's going to be some incremental investment as we move through the fourth quarter.

Our goal for the year was a $40 million reduction in debt. We've accomplished just under $30 million. I'm not sure we're going to get to $40 million but most of that generation will be from continued working capital management.

Our Operating Company, CFOs and Controllers have just done a great job for us in managing their balance sheet. We expect that to continue but there is going to be some investment in inventory going forward also.

Okay. Would it be reasonable to expect that inventory then would build some in the fourth quarter?

I would say flat to a little bit down.

Okay. Okay, well, congratulations on that free cash flow, and looking forward to more news.

Michael Levine, BB&T.

If I can just follow up on the margin discussion a little bit, in let's say Supplier Technologies and Aluminum Products, do I understand that you are kind of right now at a run-rate margin and what's going to improve the margins at this point is more volume?

Yes, I would say generally -- this is Matt talking -- I would say, generally, that's the case. I think that there is -- I hesitate to say that there is no margin opportunity at the current levels because we are always revising our cost structure and expense structure, so I hesitate to say there's no opportunity. But generally, as we think about margins, historical margins, at even a few years ago at 7%, 7%-plus, it's definitely going to take some time to get there. There's no question about it.

And so this is an obligatory question, but the "Cash for Clunkers" phenomenon, is that at all a Q3 event or is there anything in the Aluminum Products business that rolls into the fourth quarter to affect it? Or will there be a decline because there is no effect from that in Q4?

I would -- this is Eddie. I will come down on the side that the clunkers did not really affect (inaudible) aluminum in any way. I mean, we didn't feel it.

To this point about the revenue, keep in mind the aluminum business is a conversion of aluminum, and aluminum is a very high part of the selling price. You get a lot more leverage there because the inventories, the [RIP] and the raw materials that the manufacturing facilities have to maintain is virtually 0. So sales really, really affects their four aluminum, five aluminum plants dramatically. And the throughput is there.

Again, you're buying aluminum and we are literally taking a truck of aluminum from our supplier and converting it to receivable in one day. So, in those plants, you have no real raw material; you really have very little RIP. There is where velocity really makes the difference. So when you see the aluminum business starting to perk up, that is through managing ourselves in the right position as far as costs to get the reversal as you can see between the first quarter and the continually improving quarter. That has been driven on cost reductions and making their plants more efficient, which you do in these circumstances. But there is the company that, with any volume, really gets perky from the standpoint of margins and profitability because it's just a throughput operation. You buy it, you convert it, you sell it and you collect the money.

So any volume in aluminum, any volume in 2010, really helps that company. It's all cash flow. It's one of the companies we don't have to put a lot of money in, in inventories. If you've seen the CapEx this year, I don't what we spent -- what was the CapEx in the aluminum business in the last two years?

The last two years, well this year, it's been less than $1 million. It's all maintenance cap.

All maintenance cap at a company that I think previous years spent $10 million or $12 million in CapEx, and the year before the same.

So we've got the facilities. We've got the -- we are set with that business. We just need volume and the bells will ring when that gets up and it starts to run.

Okay. In Manufactured Products, could you just -- I know sometimes costs and revenues are a little lumpy coming through that business. Is there stuff that is going to be going out the door that's going to hit the books and make a difference? Then if you can comment on proposal activity that you're working on and what it looks like, and when you might start to see some bigger equipment orders.

Yes, I think -- Matt -- I will comment briefly on that. It's very challenging to know in this. There's no question that I think that we are seeing in that business. It's a global platform as you know, Michael, and I think we are seeing some benefit in some of the developing economies, which are accelerating more quickly than the United States is. There is no question that the oil and gas piece of it is accelerating a little more quickly because of the price of oil.

So, we are seeing some spots. You are right; it is lumpy. We are coming off a pretty low base. The backlogs are fairly weak at this point. I wouldn't want to try and predict how quickly they will come back.

The other thing to remember is they are on a percentage of completion accounting, so from a contract perspective, there isn't a significant amount of income that is going to roll through just shipment. It is based on the actual inventory build as a percentage of completion.

Okay, all right. So directionally it could continue maybe even to decline a little bit before it starts turning and getting better?

Well, I hope not! (laughter) I mean, the order book activity in the late spring-early summer was very, very weak, as weak as we had ever seen it. So I think that, having said that, I would anticipate that there might be some improvement, particularly with some of the foreign economies, developing economies accelerating a little bit. So I certainly hope not, but there's no question that the business is not out of the woods in terms of rebuilding its backlog.

Okay. Well, I'm with you. I will keep my fingers crossed. That's it for me. Thank you.

(Operator Instructions). John Baum, Park-Ohio.

Good morning, guys. Let's see, a couple of questions here. Do you have the full-year CapEx and also cash CapEx? Because I know you got that benefit from the state of Alabama and Ohio.

Well, in terms of CapEx, for the year, as I mentioned in my comments, I think we are still targeting less than $7 million. I think we've been pretty consistent with that budget throughout the year.

Does that $7 million include the $1.4 million benefit you got from the states of Alabama and Ohio?

No, no, we expect a couple of million dollar benefit when you think of funded debt versus total -- or funded CapEx versus total CapEx.

Very good. Let's see here. There's a public filing, $100 million on either a debt or equity. Has they been any comment on that or is that just kind of hanging out there? Would that be applied to revolver debt or long-term, or what's the thinking on that right now?

Yes, we've got -- well, two comments. I mean one is we recognize that our balance sheet could use a little work, and so we are always thoughtful about opportunities to raise different types of capital, number one.

Number two, don't read too much into that because we just really renewed what we believed was a stale filing of a couple of years ago.

Okay. Eddie, I will kind of throw it back to you. You tantalized us with the next 18 months here, that based upon a 2001 to 2003 projection or what you have quoting going forward, is that promise just overall economy, hope, or what are we looking at here?

My sense is that -- and I don't think everyone (inaudible) -- we are going to have an improving economy across the board over the next 18 months. Some would like it to go faster than it might, but we are clearly in a position in all three divisions with our caution. We've positioned ourselves to -- things should get better for the Company because the volume is there. We are at the point now where just like, as I mentioned, back in 2001, 2002 and 2003, as soon as we got the wind behind our back across the board, things started to pick up strong.

I think the first thing is, a year ago, we were all sitting around. We weren't high-fiving in October and November last year. Everyone was going into a crisis; management teams were falling apart; companies couldn't get capital. It was a very, very desperate time. In August of last year, everyone was feeling pretty good about themselves, and then it got worse and worse.

The way I look at it, our mission was to come through this without getting in trouble with the banks, pay down the debt, keep our best employees, restructure the Company across the board and get ready for the future.

We are ready for the future. I just happen to think 18 months because it just -- I thought of 18 before I thought of 24. I kind of thought year and a half, things should happen for us. It's really not based on anything other than my feeling after being around Park-Ohio and being around American industry for a period of time.

I think things are improving. Hopefully, when it does, we will be a benefactor. So it's just, John, it is just my feeling that the Company is very, very well prepared. It won't take a storm; it will just take a nice breeze to get us rolling.

Do you draw any solace from [Mullally's] comments about Ford being solidly profitable in 2011? Does that feed into the Aluminum Products at all as well as your exposure to auto, and maybe auto and truck?

Well, I think it's the best news I've heard for a long time. Clearly, it has been noticeable in Ford, obviously, for over a year, a year and a half, that the American car industry can compete. You look at their cars; you look at the style. I don't buy, necessarily, because they are pretty, but I mean General Motors particularly and Ford are doing a wonderful job with products and so forth. And it's not dead. Chrysler -- it's not dead. Quite frankly, I am excited, although we are making currently some serious knocking on the door of the transplants on the aluminum side because of the compression of other suppliers. Since we last talked, another major company went out of business in our sector.

So you have this, again, this intersection in the aluminum side where you have demand and if this car (inaudible) -- and maybe it's 8 million, 9 million this year, 7 million, 8 million. But you go to 12 million cars and Ford and Chrysler and General Motors do not go out of business, quite frankly that's good for us. It's good for the Supply Tech; it's great for general aluminum. There is a major, major reduction in the number of people that can make safety-critical parts for cars. So I love it.

Let's go forward, Chrysler and General Motors; let's get a piece of the market back. I think it's fair. It doesn't look like they are dead to me. I will tell you something, doing business with them, they are getting smarter.

Are you doing a fair amount of quoting for 2010 right now, and maybe even into '11, some platforms that are coming out in the Aluminum Products side?

Yes, in the last six months of -- six opportunities, we really took one, and there's 12 opportunities. Every day, there is someone else going out of business in the aluminum casting and die casting. It's just now, quite frankly, picking the customers and picking the platforms that we think are long-term in nature, but the aluminum business from, again -- of the five what I call financial players that came into this segment five years ago, there's only two left. Surely, by St. Patrick's Day, there will be one left. There is not -- being in this area, unless you really know how to run a company, you can't come in with private equity money -- which they did -- and enter the aluminum conversion business and make a 25% return.

I'm excited. I think we are in the right place. As you know, I've been over here by myself like a little tree in the wind talking about the aluminum business going forward, and at least you've been supportive. I thank you.

How do you prevent another Metaldyne, or is that a cost of doing business?

Well, when you think about this company in the 17 years I've been here and you look at the total exposure in bad debt and when you look at the last year and look at the bad debt experience we've had in this auto industry, which is across the board with Supply Tech -- I'm sorry about the $4 million but if that's the worst thing that happens to us in 2009, considering what could've happened and how many corners we got out of with Chrysler and others, no, I'm not happy about that. Again, I am the largest shareholder, but those things do happen; that's a simple fact of life. But generally speaking, we run our credit department so tight that it hurts, but okay.

Buffett made a big bet on Burlington Northern, so it looks like the railroad industry is going to be around. I know you guys sell into that too. One final bookkeeping question here -- have you got a year-end debt number, Jeff or Matt, goal?

Well, total debt -- we, once again, we are looking for a $5 million to $10 million reduction between now, between the end of September and the end of the year.

Okay, very good. Good luck guys. I'm with you. We will talk later.

Thank you. There are no further questions at this time. I will now turn the floor back to Mr. Crawford for any closing remarks.

Well, I want to thank all the stakeholders in the Company. Particularly I know that a lot of our employees stayed up after work and listen to this telecast and special regards to them and the hard work and willingness to stay with us as we go down the road of the future. We are very pleased and, hopefully, we will have some exciting news as we move into this 18-month calendar.

Thank you. Good day.

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