Park Ohio Holdings Corp (PKOH) 2010 Q3 法說會逐字稿

Good morning and welcome to the third quarter 2010 results conference call. (Operator Instructions). Before the conference call begins please remember that the Company will be discussing some issues that are historical and some issues that are forward-looking. When the Company speaks about future results or events there are a variety of factors that may materially change their actual results from those projected. A list of relevant factors that may be found in the earnings press release as well as in the Company's 2009 10-K filed with the SEC on March 15th, 2010. The Company undertakes no obligations 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 is considered a non-GAAP financial measures as defined by the SEC. The Company may present EBITDA because management believes that EBITDA could be useful to investors as indicated of their ability to incur and service debts and because EBITDA is a measure of use under their credit facility to determine whether they have incurred additional debt under such facility for reconciliation from income before income taxes to EBITDA. Please refer to the Company's current report on Form 8-K furnished to the SEC on November 8, 2010. Now the meeting will be turned over to Matthew V. Crawford, President and COO. You may begin your conference.

Thank you very much and good morning. The third quarter revenue was up 20% versus last year ending the same period to a total of about $203 million. The quarter was capped in September with our strongest monthly sales during 2010. EBITDA as defined almost doubled from last year to a total of $20.5 million and earnings-per-share showed a significant reversal from a loss of 2009 to $0.52 per share. Additionally, total net debt came down by more than $3 million after taking effect of the $18.2 million purchase price of ACS.

Now looking at the individual segments. Supply Technologies revenue increased 26% year-over-year and 7% sequentially from the second quarter. Included in these results was revenue associated with the ACS acquisition for the month of September only. Strength has been across the board from last year with particular success in trucks, semiconductor and recreational sports.

Operating profit margins also improved due to the incremental volume to over 6% or approximately $6.4 million. This increase represents an incremental margin of almost 20% on additional sales. While this is atypical for this business it does demonstrate a trend we hope to capitalize on as the economy recovers and we fully integrate ACS over the next six to nine months.

Aluminum Products revenue also grew by 12% during the quarter largely due to the recovery in the production levels in the auto sector. The profitability also reversed nicely from a loss last year of $1.3 million to a positive of $1.9 million or a margin of 5.4%.

Manufactured Products grew 17% versus 2009 as volumes continue to recover in parallel with the global manufacturing markets. More importantly, as an indicator of future activity bookings in our global new equipment business are up 50% for this year year-to-date versus last year. Due to this resurgence of activity we're optimistic that revenue will continue to improve throughout the rest of the year despite some weakness in the locomotive end market.

Operating profit has also recovered nicely reaching $8.3 million versus $3.4 million last year. Although we always get some volatility due to product mix in this segment we're optimistic that improved volumes will benefit what is already our highest margin segment.

Looking at the balance sheet we're especially pleased with our continued strong cash performance. Net debt decreased by more than $3 million after giving effects to the $18.2 million purchase of ACS. This brings our year-to-date total debt reduction to a total just shy of $25 million.

Our revolver availability at the end of the quarter stood just in excess of $50 million. CapEx for the quarter was about $1.5 million. We expect CapEx for the year to be about $4 million.

In closing we're cautiously optimistic about the Company's outlook although we continue to see positive signs in the demand trends we're also aware of the uncertain business climate globally. Accordingly, we are increasing our sales forecast to just over $800 million at an earnings-per-share target of $1.25. Thank you very much.

Thanks, Matt. Just a couple comments. We started this year 2010 the plan to have what we called a controlled ascent of the business particularly in light of the amazing compression in revenues in 2008 and 2009, and more important prepare the Company for the future. We always felt that through a crisis like this you can make some changes and the things necessary that when the revenues return the Company can really prosper from the earnings-per-share. I think we have accomplished that. I will talk briefly about our three silos at the Company, different business units.

Supply Technology continues to be an outstanding performer moving along briskly with the increase in revenues. We expect that to continue to improve as sales across our large base of world class manufacturing companies increase globally and particularly in North America.

We were fortunate enough to make an acquisition. We started the year concerned about making any acquisition but one appeared that we felt was absolutely -- it's probably the one of the best acquisitions the Company has ever made. We call it a bolt on meaning if fits directly into Supply Technology.

This is a company that was well managed, having a customer base that we have been envious of. It's a little bit smaller in size per customer compared to some of our really major international companies, but this is a company we were a little jealous about in the eyes of the beholder. They had some accounts that we really wanted, but they really embedded with this customer or there supplier ACS because of the management team, the quality of service, so this was not a broken asset. This was an asset that became available for all the right reasons. We made the decision and I think we're going to be able to expect great things.

These customers particularly controlled by ACS they were able to supply them in North America but was not able to supply their very global customers internationally. So this is a company, or that segment or that add on to Supply Technologies, will be one that can grow organically add a lot to international sales.

Very pleased with that. I'm sure you can pick that tenor in my voice up. This is a very good strategic decision for the Company going forward.

Let's move on to Manufactured Products. This for many years was a real generator of cash and profitability of the Company. When we had this compression and the sales and revenues went down internationally, it lost it's momentum but it's on the way back. We know it's on the way back because the first thing that happens in a capital equipment business before the new orders come and when people are starting like Bousfield and companies that are starting to ramp up their oil and gas efforts, the supply parts and the service come first.

So we're seeing an increase in service and parts around the world, in North America and we expect right behind that will become new orders hopefully for equipment. So that seems to be right where we would like it to be.

Lastly, General Aluminum. This has been the one that's been a couple of times frightening in the last two years as we've prepared it for the future. We talked about that intersection where the supply base would shrink down due to closures and the automobile business would ramp back up and that is in the process of happening.

There is an evolution taking place in the automobile industry in the move from hydraulic steering to electronic steering systems and our new customer, ZF, leads in this particular area. We're going to be participating in that in the future. That gives us a footprint in what would be clearly one of the most important changes ongoing in the auto industry.

And when we talk about the auto industry we're talking about domestic automobiles as well as the offshore efforts. We're back and have been very successful in our relationship with Chrysler. We still feel that based on being there that they're making all the right decisions and the Fiat relationship seems to be working well and we have taken two new platforms and these revenues will begin in 2012.

So when you take the three businesses, our units, it's been a long time since they were all ready and poised and positioned to again be the benefactor of increased revenues. We are accomplishing these results with a little wind at our back. It's not exactly overwhelming, but clearly the Company is a better company today than it was going into the crisis and we are looking forward to growing all three segments. It would be wonderful if they are all seem to be going in the right direction at the right time, and so we're really happy about what we've accomplished. I want to thank all employees that somehow spend an hour or so after work listening to these presentations but thank you and thank all the stakeholders in the Company, but we really have never been in a better position.

So at this particular time I would like to open the lines to any Q&A. Again, thank you.

(Operator Instructions). You have a question from the line of Richard Paget with Morgan Joseph.

Good morning, guys.

Hey Richard. How are you today?

I'm doing well. I am assuming you guys are doing well.

We feel pretty good out here.

I guess we'll just take each segment order in order. First starting off with Supply Tech. Could you be a little bit more specific in some of the new customers that ACS adds?

Richard, it's Matt talking. How are you?

Good.

No. As we typically don't and with rare exception we're not going do disclose specific customers names, but they are largely reflective of our typical customer at Supply Tech which is a multi-billion dollar company with certainly a national footprint, if not a multinational footprint. One of the things that we liked about the customer base was a lot of times you find in an acquisition target in this business a company with is weighted perhaps too heavily towards an individual customer or couple customers. What we liked about this blends of revenue which is just north of $50 million is a very well balanced portfolio. I don't think any individual customer accounted for much more than $5 million a year in sales.

We really found that to be attractive versus some of the companies that we bought in the past that were very dependent on one or two customers. So we found that to be attractive. We think there is a number of growth opportunities with these customers both domestically and internationally so we think that this business is poised to grow both independently and as part of the Supply Tech network.

Does the acquisition further diversify your end market exposure or is it additional to end markets you already serve?

I would say that it modestly diversifies, but I think that the thesis of this acquisition was more about it being a direct competitor. We did share an account so the thesis was less about end market diversification although there was some of that. As opposed to something like the Nampac acquisition you may recall which was about diversifying into the consumer electronics area. This these was more about increasing content within our current network.

Hey Richard, by the nature of Matthew's comments this lends itself to a better opportunity from a consolidation standpoint of warehouses and operating expenses.

And then just looking at the strong incremental margins in the quarter with the integration of ACS will that maybe take a little bit of a pause and we'll have some integration costs and maybe this north of six operating margin it might take a little while to get back to that?

I think you raise a good point. From a formal perspective I think it's likely we'll see a modest restructuring charge in the fourth quarter as we try to do some of the things that will make ACS a better business long-term.

So I think from a product mix standpoint if you will, or from a customer mix standpoint, certainly ACS comes to us as a lower net margin business than our core business. So there is some work to be done unquestionably. So the answer to that is yes.

Having said that it's a business we understand. It also comes to us with a very good management team. We've had an opportunity to spend a fair amount of time with the ACS senior management team and we've have just been impressed by the group across the board. We're going to be careful in how we integrate this business and make sure that we don't damage what essentially is a pretty good team and execution team at ACS, but then of course look for opportunities to increase margin as well.

Okay. And then moving on to Aluminum Products. obviously that business with four quarters of profitability seems like it has turned around. Although I guess to play devil's advocate, sequentially revenues are down a little bit, profitability down a little bit. Is that something seasonal? Are you guys having some startup costs? Just trying to get a sense of what the trends are there.

Well, I don't think this business, particularly when you are having a startup and add on and certain product lines moving out and certain ones being added, it's not going to be a straight uphill climb. You are going to have some quarters that go up and down and shipments and everything else so it's really hard to measure something as dynamic as this turnaround is and measure it by quarter by quarter.

I mean clearly the Company was in a recovery mode and going the right direction before the first quarter of 2009 and it's continued from the second quarter of 2009 straight on through where we are today, hopefully to the future. Also keep in mind that we're adding business here without spending a tremendous amount of CapEx. We are utilizing the facilities that we pay paid for in 2007 and 2008. It might appear to be lumpy to you but to me it looks like it's all straight uphill.

And then with the new business getting added in 2012 can we expect some startup costs in the second half of 2011?

There's always front end loaded these costs in the aluminum business although the business that we have been successful in obtaining there's two blanks of parts of it. The electronic steering business is new. I mean I think the next five years most cars in America will have electronic steering.

So there's always these dollars connected to the startup of a new technology, but when it comes to running the old plants, yes, there will always be probably be in 2011 will be some costs early onto set the table for the dynamics that happens in the fourth quarter and in 2012, 2013, 2014 and 2015. In other words, you are spending the money for a five year run. There's some expense up front but, again, I don't think it's lumpy. When the total results are the revenues will continue apparently to grow.

Okay. Then finally moving on to Manufactured Products. Matt, you mentioned there was some strength in the oil and gas and steel and then some of the aftermarket. Any other areas that are strong and I guess conversely you mentioned locomotives were down. Any other areas you can give us some more color on?

Yes. The locomotive builds is really the only glaring obvious negative. In terms of end markets though, what has been interesting relative to the recovery in the new equipment business is it's been disproportionately driven by a recovery in the US market which has been great.

We're seeing nice shipments both on the induction side and the oil and gas business here in the US. I suspect from an oil and gas standpoint it has to do with some of the tariffs related to the action taken against the Chinese for dumping tubular goods in the US. So that's benefited our business an we think will continue to as foreign companies and US domestic companies invest in that production here in the US. And the rest of it is really just a general recovery in the induction business.

I mean we're still not obviously getting any with where near our peak performance in 2007 and 2008. So I think that we're going to continue to see strength there across the board. As I mentioned, margins are going to be a little volatile as they grow. As that business grows depending on I guess the significant contracts that get signed and where they get made and plant optimization and so forth. It will be a little mixed but we are certainly seeing an upward trend.

Given the costs and I guess this is general for all the business that you have squeezed out in this down cycle, do you think you can top peak margins from the top of the last cycle?

Well, from a philosophical perspective I would say that we have three different businesses with different margin characteristics. Clearly our manufactured product segment driven by our forging and our equipment group are higher margin businesses and they will contribute.

When they contribute disproportionate share as they did at the top of the last cycle we're clearly going to get better margin performance. Certainly we love the return on investment model as you know for Supply Technologies, but with that comes a smaller margin business. So it's very difficult to answer that question without being able to really define where the volume growth comes from.

Right. But mix aside on the individual operating segment basis. I mean you feel pretty good with the way you're positioned?

Yes. As you can see particularly in the Supply Tech business with the abnormal or I think I said atypical flow-through and incremental margin we have got this thing -- because of our concern over the economic outlook we continue to keep this thing as tight as possible as it relates to the cost structure and the business. Is that sustainable? It's unclear.

I would say that we're still conducting ourselves as though there is a real amount of uncertainty in the business so I think that's not uncommon among people sitting in our chairs and we're optimistic that the economic climate, and visibility I will say, will start to clear. I feel good about the current quarter but certainly visibility is still not where we would like it to be.

All right. Thanks. I'll get back in queue.

Your next question comes from the line of David Marsh with Odeon Capital.

Morning. Thanks, guys for taking my question and good quarter.

Thank you, David.

Just a couple quick housekeeping items. You have a figure for capital expenditures during the quarter?

Yes. I think I just said on the call a few seconds ago that it was $1.5 million for the quarter and $4 million for the year.

Okay. Great. And I know it's a little bit early but do you have at this point a preliminary forecast for 2011 for CapEx?

No. It's premature we're in that process right now.

Sure. Understood. When you look at the ACS business it's about a $50 million revenue run rate business and when you look at the new customers that are being brought onboard. What do you think that business has a potential to grow to if you can just get through the entire customer base in all of their international locations?

Oh, boy. There's some awfully big companies and parent companies of some of the current customer list, so more than we could effectively implement. I mean the market would be a very high multiple of what the current revenue level is, but I think the gating item there would be how to implement it effectively rather than what the opportunity is.

Dave, answering in a different way this particular segment if you want to call it that will probably grow faster internally than the total base business because the opportunity do presents itself from the foreign implication of -- in growing with these customers. We offer more services and I think that they are very anxious to participate in a bigger relationship.

Sure. Just again on the bigger picture items. I mean your revenues have increased now sequentially five quarters in a row and based on the guidance we should be modeling a 6 sequential increase in revenue in the fourth quarter. Obviously we are still arguably early in the recovery. As we look to 2011 and beyond I mean should we think about continued sequential improvements on a quarterly basis throughout 2011 or do you think that your business would return to a more typical seasonal pattern that you would have seen in mid cycle?

Well, that's really attached directly to the energy and the recovery. We'll do very well in the current recovery rate and we'll do better if the rate of growth expands. We're going to follow that.

But it's pretty hard for us to sit here and look into the future other than our visibility is good and we're going follow the economy and we'll do very well at these numbers or lower, but we're going to do particularly well if and when this begins to be more robust across all the platforms. Keep in mind the great thing about this Company it's got a lot of opportunities. It's very diversified, it's international, it's got three silos, it's in a lot of businesses and a lot of world class customers so we're going to be the benefactor of any move in parts of the economy or in the total economy both international and North America. So I think we're well positioned.

It would be very hard to look at this thing you know quarter by quarter. We're in the process right now of putting together and finishing up our 2011 plan and we hope that we will do obviously better than the year before.

Sure. Let me just ask one other big picture question a little bit differently. When you look at the customer base and you look at the inventory levels of the customer base, do you feel like -- I mean obviously you're in dialogue with them on recurring an probably daily basis. Do you feel like they are still keeping inventories at conservative type lower levels where there's some pretty significant opportunity for growth there if the economy does start to recover, or do you think that they've effectively replenished and are back to pushing back towards like mid cycle type inventory levels?

No. As I indicated -- this is Matt. Sorry. As I indicated in my closing comments, despite what we think was solid performance in the third quarter we are not certain that any of our customers are expecting or looking at substantial growth in the coming months or expecting a return to any type of peak performance at the revenue line. So we continue to think there is a fair amount of uncertainty and our business plan is consistent with a lot of our customers which is we're in a wait and see mode. It's been normalized down to a level where people are fundamentally they're right working capital levels for the current demand which is a lot better than last year, but still well below peak products.

Sure.

We just are not seeing that kind visibility from our customers who are saying that they're expecting significant leaps in demand going into next year. That is not the tenor out in the marketplace. It doesn't mean that they're not confident, that there's going to be incremental opportunity and a solid environment, but certainly nothing like 2007 and 2008 at this point.

Right. Sounds good. Well good progress guys, and good quarter and best of luck for the balance of the year.

Thank you very much.

Your next question comes from Michael [Levin] with BB&T.

Good morning.

Hey Michael, how are you doing?

Good. How are you?

Very well.

Just a couple questions. Any particulars on the $3.5 million asset right down what area that was in?

Yes, Michael. This is Jeff Rutherford by the way.

Hi Jeff.

But what that is we have investment in an MBD High Pressure Die Casting facility that this year, based upon their performance, based on our evaluation of their performance we took an impairment of our investment, the $3.5 million, and then we took possession of the assets of that facility. And we are currently operating that facility relative to a turnaround in performance and salvaging of the business that can be salvaged.

Okay. ACS was a partial quarter for them, right? Wasn't quite the whole quarter revenue?

It's Matt. As I said in my comments the only month included was September.

Can you give us any estimate of revenue and EBITDA for the month?

From a sales perspective it was consistent with our just north of $50 million, I guess annual expectation. I wouldn't give you any EBITDA numbers other than to say that it's somewhat consistent with our expectation that the business was modestly profitable when we bought it.

Okay. All right. Any update on paying down your bank debt, any bid on the schedule and when you might be taking chunks of that out?

In particular on the term debt? Is that what the question is?

Yes. On the term debt.

Yes. We have a schedule on term debt. That B is a two year amortization. There is a pre payment requirement relative to excess cash flow. That B although based on our performance an cash flows and availability the banks that didn't participate in the B would like us to pay it off early.

We haven't made a decision yet to pay it off early, but regardless it'll amortize through the first half of 2011 so by the fourth quarter of next year it will be fully amortized. The A which is secured in equipment and real property, US equipment and real property is a ten year amortization. There's no reason for us to pre pay that at this point in time. That'll amortize down.

And then the revolver is basically US and Canadian cash flows right into that revolver and we're in a very good position right now. We're in a better position today than we were at the end of the third quarter and we anticipate that to continue. Our operating companies are doing a fabulous job of working capital management and they continue to do so and with the EBITDA increasing, the North American portion of that goes directly to pay down the revolving debt.

Okay. So it's basically what you're going to use your cash for just to take down the revolver?

Yes. Well and then this year the net debt would have been paid down $42 million. We used $16 million of that to acquire ACS. $16 million of revolver availability and obviously working capital, leveragable working capital came with that acquisition and $2.2 million of debt with the seller.

Okay. All right. That's it for me. Thanks very much.

Thank you.

Your next question comes from the line of Doug Ruth with Lenox Financial Services.

Good morning. Congratulations on a good quarter. Following on the same theme, is there any thought on the bond and bond refinancing at this point?

This is Matt. How are you?

Good.

Yes. No. We are obviously monitoring the performance of the high yield market. We've got a little over four years left before the maturity on those securities, so there is a hefty pre payment option at this point. So you know it is something that we're monitoring and we recognize there is some opportunities out there, particularly given the performance of the Company. It's always on our minds.

All right. Nothing on the near-term horizon?

Yes. As I said, we constantly look at it but we have to fully appreciate from a financial perspective the -- it's great to know our bond are trading at par or above and it's great to know but it's till pretty nice four and a half year paper and I think we've got some opportunity to improve the credit card [characteristics] of the Company even more. And it's not cheap to take them out at this point. We've got to roll that into our own analysis here and all I can tell you is that we look at it all the time.

Okay. Thank you. And congratulations on that nice quarter.

Thank you very much.

(Operator Instructions). You have a question from the line of Matt Vittorioso with Barclays Capital.

Yes. Good morning guys and great quarter. Just a couple clean up items for me. Could you provide cash from operations for the quarter?

Cash from operations?

Yes. Just trying to back into free cash flow for the quarter.

Yes. It's going to be -- for the quarter -- for the half.

Or even nine months.

For the nine months it's going to be just under $50 million.

Just under $50 million. Okay. And then, Jeff, could you provide the breakdown between revolver term A and term B as of the end of the quarter?

Yes. I have that. Hang on a second. The at the end of the quarter the A is 26.6.

Yep.

B is 9.6.

Okay. And the balance is.

And the balance is revolver.

Okay. And then last, sorry if I missed it, but you have done a great job in generating cash for the first three quarters of the year. What are your general expectations for the fourth quarter? Should we expect another quarter of solid free cash flow?

Well, we're going to have an interest payment, a bond interest payment in the fourth quarter and right now we are forecasting for the fourth quarter cash flow to be effectively break even.

Would you expect working capital to use cash in the fourth quarter? Is that what would lead to you break even?

Yes. I mean obviously we're going to be positive EBITDA in the fourth quarter so after the interest payment and we'll have some tax payment we know what our CapEx is going to be. We have a modest use working capital. Cash use in working capital in fourth quarter.

Okay. That's helpful. Thanks, guys.

But our expectations -- our goals are much higher than that.

Sure. Good quarter. Thank you.

Your next question comes from the line of John Baum with shareholder Park-Ohio.

Hi Guys. How you doing? Fantastic quarter.

Thanks John.

You keep hitting the ball out of the park. Just following up on some of the previous questions. Is there a year end inventory target?

Yes. But that's not something we give guidance on, John.

Okay.

Obviously we have working capital targets.

Okay. Very good. And how about full year cash taxes, have you got an estimate for that, Jeff?

Yes. We've paid a $1.2 million through the first nine months. It's going to be around $2 million and that's basically foreign tax. We're still on [analog] carry forward position for US.

How much [analog] carry forward do you still have?

The net number is about $12 million so the gross number is somewhere in the mid 30s.

Thank you. I noticed the depreciation amortization was down in the third quarter, Jeff. Is that because Aluminum Products was down or is that -- I can't really annualize that can I? Why was that G&A down a little bit.

G&A is down because the last couple years our CapEx is down.

Oh, okay. If we project in 2011 it will be down absent new builds?

Yes. We're running what we're going to run this year about 18?

It's going to be about 15, between 15 and 16. We have historically been running 18. I could say you could model it out at 16.

Sixteen. Very good. Eddie, I will come back to you. What do you see with Ford, the big three, maybe car sales next year? Are you knocking on any other auto makers doors?

We're all excited about the fact that they'll sell 12 million cars. We haven't lifted this concepts that it's going to go higher but it appears that it's going to go higher. So we're still thinking 12 million cars and a smaller supply base. So we haven't really started dreaming about cars at 12 million, 13 million, 14 million or 15 million.

But quite frankly, I've been in Detroit a lot recently. Everyone's pretty excited up their and in particular the Chrysler is coming out with two brand new platforms, a sedan and an SUV and we're part of that. Right now I think all the car companies -- and quite frankly there's some indications that a lot of Japanese manufacturers of die-casting particularly are losing momentum over there and that work might come back to America.

So it hasn't all shaken out yet, but at 12 million cars which we think we will achieve in 2011, 2012, 2013. I think we're on good shape. Just again, we haven't lifted and we haven't started acting like there's going to be 14 million or 15 million cars.

Okay. And finally, can you comment on international markets, Europe, maybe China?

From the total Company view point or from the aluminum view point?

Let's go total Company.

John, it's Matt. How are you?

Good.

Yes. As we discussed a little bit earlier as it relates to specifically to our equipment business. First, I would say that it is soft on a relative basis, a disproportionate share on a historical basis of our new order bookings in the US. It doesn't mean that we're not seeing activity there. We are. But clearly on a percentage of the total bookings they're not as robust as we have seen them in the past, so I think particularly in Europe you're still seeing a recovery mode.

As it relates to Supply Technologies, I think that business continues to stay reasonably strong. Some of our customers I know are moving, relocating some operations into Asia, specifically Singapore. So we're seeing real robust activity continue to happen in Asia. I would say that we are seeing some strength here in the US market, but obviously followed by continuing resourcing activity and strength in Asia and certainly Europe is lagging.

Fantastic. Really a great turnaround year and this investor renaissance continues we've got good stuff coming. So keep up the good work and we'll talk later. Thanks.

Thank you very much. We're going to take one more call and then we're going to have to move on to other activities.

There are no further questions at this time.

Well, I want to thank everyone for joining this morning. We appreciate everyone's support and every stakeholder in the Company and I believe we're going in the right direction out here and we look forward to continuing our current success mode. Again, thank you very much and have a nice day.

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