Park Ohio Holdings Corp (PKOH) 2011 Q2 法說會逐字稿

Good morning and welcome to the second quarter 2011 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 2010 10-K filed with the SEC on March 9th, 2011.

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 is considered a non-GAAP financial measure as defined by the SEC.

The Company may present EBITDA because Management believes that EBITDA could be useful to investors as an indication of their ability to incur and service debt, and because EBITDA is a measure used under their credit facility to determine whether they may incur additional debt under such facility. For reconciliation from income before income taxes to EBITDA, please refer to the Company's current report on form 10-Q furnished to the SEC on May 9th, 2011.

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

Welcome to the Second Quarter 2011 Park-Ohio Conference Call. I would like to turn over the program to Matthew Crawford, the President and CEO of the Company.

Thank you very much. Our results from the second quarter continued to show an acceleration in our key markets. Revenue for the quarter was $247 million, a 24% increase from 2010. This performance was underpinned by sales growth and increased bookings in most businesses and end markets.

As previously discussed, the Company also completed an opportunistic refinancing during the second quarter. Highlights of the transaction included the issuance of $250 million worth of ten year senior unsecured notes, which were used largely to refinance our 2014 notes. In doing so, we achieved a lower coupon, extended our maturity and increased our cash position and flexibility.

Transaction expenses recorded in the second quarter totaled $9.4 million. Excluding these expenses, earnings per share was $0.69, up from $0.29 in 2010, and the EBITDA also increased 35% to $21,300,000.

Looking at the individual segments, supply tech revenue was enhanced 29% year-over-year to a total of $125.5 million. The results were driven by a significant pickup in heavy duty truck market versus last year combined with ongoing revenue increases in most end markets.

Average daily sales has stabilized at above $1.7 million, a range which we anticipate into the foreseeable future. Operating profit was $8.4 million, up 59% from last year. Operating margins at 6.7% were improved despite being adversely affected by raw material inflation. And we are working aggressively to stay in front of this issue.

Aluminum products revenue was $33.4 million, down 11% from last year. Relatively strong build rates were offset by the end of life programs, which we have discussed in detail on other calls. We expect this trend to continue throughout the rest of the year with a bottoming out occurring in the fourth quarter.

Operating profit was $1.3 million, a decrease from $2.3 million last year. We will continue to experiencing the deleveraging effect also through the remainder of the year and expect that the reduction in revenue will impact profitability in this segment sizably.

Manufactured products revenue was $88 million, an increase of 38% from last year and a significant improvement sequentially, as well. Strong performance was supported by a resurgence in the industrial equipment bookings, particularly in our induction heating product line.

Geographically, a strong North American environment was augmented by some modest improvements in Europe and Japan. Revenue also benefited from a vastly improved rail market since last year.

Operating profit in the segment improved to $11.3 million from 7.6, an almost 50% improvement. The sequential improvement in the segment was also notable, although we expect the rate of improvement to moderate as we go into the second half of the year.

Cash flow for Park-Ohio year-to-date before taking into account the refinance cost was about $7 million. This is slightly worse than expected due to a slight build in working capital based on sales growth improving more rapidly than planned.

Our 2011 forecast, cash flow forecast for the balance of the year, is approximately $15 million. CapEx during the quarter was $3.8 million for a total of $5.3 million year-to-date. Total net debt increased to $287 million during the quarter, largely as a result of the refinance cost.

In closing, we're pleased to be nicely ahead of our internal expectations through the first six months of the year. We anticipate most businesses will continue to perform well throughout the rest of the year, but we expect the rate of improvement to moderate.

We continue to have significant concerns surrounding the aluminum products segment and are uncertain exactly how the reduced revenue will impact profits in the second half, particularly as we absorb new expenses related to the launch of business for 2012. Therefore, we are reaffirming our guidance of $1.85 to $2 and increasing our revenue guidance to $940 million.

Thank you very much.

Thanks, Matt. While, I think Matt's done an excellent job of covering our supply technologies and the specialty products group, manufactured products, I want to make a couple of direct comments on general aluminum. The long anticipated deceleration of not only revenues and the profits has begun, but I'll assure you is in direct line with our projections. So, there's no surprises. We've talked about this.

We also talked about the future. We also talked about new revenues. Earlier this week, I think on Monday, we received a new additional order. This particular part starts in 2012. It's between 8 and $10 million a year, and it's a five year contract. So, we have begun to build the backlog we talked about. I feel very confident about the future of the aluminum business. We are going to go through this deceleration, again, in revenues and in earnings. It has begun, but it's built into the plan. We understand it. This is no surprise.

And quite frankly, we're very optimistic that -- this is our second major order that begins activity in 2012, and I am -- hopefully, at -- in the next conference call, we'll be talking about additional new business in this area where we think there is a bright future. For the first time, as we've talked before, we're very, very close to having all three silos, manufactured products, supply technology, and the aluminum business, all running together. So, that speaks optimistically for '12, '13 and '14 and beyond.

So, we appreciate the continuing support, and I'm now going to open the lines for any questions. Thank you.

(Operator Instructions.)

Your first question comes from the line of Michael French.

Hey, Mike, how are you doing?

Good, good. Hey, congratulations on the strong results.

Well, thank you very much.

First, I'd like to ask you about the new order you mentioned, the 8 to $10 million. Is this part of the steering columns or exactly what is this order for, and who's the customer?

Well, we don't want to talk about the customer today. It's one of the major auto companies. But, it's a control arm, a steering control arm made -- instead of out of totally cast aluminum, it's a hollow arm. It's higher technology that's been -- it's being introduced now to our company and others. So, it's what you need to steer your car and control the front end.

So, it's -- we specialize in, particularly in knuckles and steering arms, and we talk a lot about the new [electronic] steering. So, I -- at this time, I'd like to just skip on the particular customer, although you -- it's a name you -- it's a household name in America. But, this is a -- continues to be a lot of activity. As you know, there's lots of new platforms out there, so this is just one hopefully of a series of orders.

Okay. Well, can I ask it this way - is it a new customer?

No.

Okay, fair enough. And then, I'd like to ask Matt on manufactured products, a very strong quarter, and you mentioned that particularly there's strength in North America. Wondering if you could elaborate on the trends and how sustainable you think that is.

Sure. Well, we I think saw -- I just sort of would say first that we did benefit I think in the second quarter, not only from an improving capital spending environment, particularly in North America, but we also saw some orders slip late first quarter into the second quarter. So, the second quarter I think benefited not only from an improving environment but also from a little bit of that push.

But, no, we continue to see capital spending strengthen. Our order book continues to reach recent highs, North America particularly driven by auto and steel end markets as well as the amount of gas drilling that is starting to permeate this part of the country is significant to our oil and gas drilling business, as well, so -- our tubular goods business.

So, really across the board, we're seeing strengthening in that part as a recovery from capital spending that didn't occur during the down cycle, and then incrementally, a little capacity building in certain places, oil and gas being the notable. We anticipate that to continue here in North America. There's certainly not been significant expansion spending, but it's starting to come back into the marketplace.

As it relates to outside the US, Europe has been pretty weak for us now for quite a while. We are seeing our business pick up there, not only in terms of new equipment, but also in terms of aftermarket. So, that's a positive trend. And Japan has been a strengthening market for us over the last six months, as well.

So, I guess the answer to your question, the trend in North America continues with a little bit of help from abroad.

Okay, thank you. I appreciate that. And the final one for me, I'd just like to ask you about uses of the cash. You've got $60 million on the balance sheet now, and as you mentioned, you're looking to generate $15 million this year. What are your priorities for the use of cash?

We sort of expected this question at some point, but we're so used to talking about bringing debt down that we weren't perhaps as prepared for that question as we should be. Right now, we're enjoying the flexibility of really a reduced net debt number and having some cash on the balance sheet gives us. We are -- clearly feel as though there are some opportunities to use that for some growth capital. As you can see, accounts receivable are building a little bit. Working capital's building a little bit. So, there are opportunities to enhance our organic growth, number one. We are using it, as well, to be -- to fund some of our CapEx expenditures.

So, on the organic side, I think we can use some of that money to increase the growth of the business. We will continue to look for tuck in acquisitions. Many of you on the call have watched our business in the past and know the types of deals that we like to do. I think that the cash on the balance sheet gives us the flexibilities to not only do those domestically where we would use our line of credit, but also to do some small tuck in deals internationally, as well, where lines of credit are a little more challenging.

So, I think you can expect us to continue to do business as we've done in the past and have the added flexibility of having that cash, as well.

Matt, the only thing I'd add to that is that over $50 million of that cash is international. And for us to bring that money back to the United States would be rather expensive. We continue to be in an NOL for US tax purposes. And if we brought that cash back, we would trigger gains, dividend gains on that. And we would not be able to use our foreign tax credits that were generated when we paid taxes in other countries.

So, it would be expensive to repatriate that cash. So, that cash, as of right now, is going to stay in our accounts through our Irish treasury company. We do have some cash in the US, and it's at the holding company level.

Thanks, I appreciate that added detail there. And that's it for my questions. I'll turn it over to the next questioner.

Thank you.

Thank you.

(Operator Instructions.)

Your next question comes from the line of Ajay Kejriwal.

Hello. Thank you. Good morning.

Hey, how are you today?

Good. Congratulations. Good quarter.

Thank you.

So, I guess my first question is on gross margins. Very strong gross margin performance - I guess it's the highest, at least in my model, the last several years. So, maybe any color on what's driving that gross margin performance - are you getting pricing better than cost, or is it factory efficiencies? Any color there will be helpful.

I guess I'd answer yes, yes and yes. No, Ajay, we are -- clearly, first and foremost, product mix for us is impactful. The manufacture -- strength in the manufactured product segment with always come with a higher margin experience. Our forging business typically carriers a higher margin, so plant utilization there is key. It hurt us in the downturn. It hurt us last year when rail was weak. So, with that recovery comes pretty high margins, tons of operating leverage in that business and in the industrial equipment business.

So, first thing I'd say is product mix. Second I would say is, yeah, we're -- we have experienced, I think, a better pricing environment generally. I still don't think that it's optimal. But, clearly, in some of the more challenging businesses, we are finding ourselves with an opportunity to get slightly fairer pricing. That is somewhat offset by the raw material increases that I've mentioned. But, at this point, we're staying nicely ahead of that and having the right conversations on pricing at the right time.

And that product mix, (inaudible) that's mostly manufactured products, or is it in other businesses, as well?

No, I think that as you look at our gross margin comprehensively, the manufactured product segment strength will carry higher margins and will carry our business higher. I would say it's less notable in the supply tech arena and in the GAMCO arena. But, certainly there, I think that, despite -- I think what we talked about in aluminum castings, which is the shrinking revenue base, those products that are in cycle there are end of life and carrying decent margins. And in the supply tech arena, I think we're seeing, once again, offset a little bit by raw material inflation, I think that we've seen better operating leverage, clearly. So, I think that we're staying in front of that game, although I don't think those margins are optimal yet, either.

Good. And then, just a clarification on your cash flow updated guidance - is that $15 million a second half number or is it a full-year?

Well, that's our goal for the second half--.

--Got it--.

--As you can see from the balance sheet, we spent a little money on accounts receivable in the first half, and we see that leveling out a little bit, if not harvesting a little bit of that receivable in the second half.

Got it. So, you've done $7 million year-to-date and $15 million second half. Good.

Right.

And then, maybe a last one from me on SG&A - so, I guess you're spending on -- in supply tech with all the new account initiatives. How should we think about that expense line going forward?

Well, that's mainly driven by headcount. And we're back to a level of normalized salaries, compensation, bonus and so forth. So, that's why you see a little bit of lift over some of the historical levels. But, we are still at a point where we're not adding significant headcount. So, that should be leveling out somewhat in the coming quarters.

Ajay, I would agree with Jeff and say that we did address in the second quarter for the first time in more than two years compensation levels around the business. So, we were -- that was impactful relative to increasing SG&A during the second quarter. But, I would consider both our personal levels and our comp level to be at a more typical range now moving forward.

Got it. Thank you very much.

Thanks, Ajay.

Your next question comes from the line of Michael Corelli.

Hi, good morning.

Hey, Michael. How are you today?

All right. And you?

Very well, thank you.

Congratulations on a great quarter.

Appreciate that.

Just a couple of questions - I mean, I know you guys like to be conservative in your guidance, and I understand your stance. But, clearly, you've had a tremendous first half of the year with earnings of $1.42. So, based on my calculations, you would need to earn $0.43 to $0.58 versus $0.70 a year ago excluding unusuals. And considering your -- you talked about your confidence in supply technologies kind of maintaining the average daily sales rate, you talked about strong orders in backlog and manufactured products. I know the aluminum products is a little bit of a wildcard, but that's not the biggest needle mover at the company as far as the size of the profitability there.

So, it seems like you're being overly cautious to give down earnings results in the back half of the year considering the momentum in your two most important businesses profit-wise.

Well, Matthew can [pine] on this, but quite frankly, this guidance has been there for some time, and we're comfortable with it. Maybe we are being cautious based on things in or out of our control. These numbers are numbers that we can attain, that we can post in good weather or bad weather. And the numbers, as you've described them, would bring that into question that we'd have a much stronger second half of the year.

But, here we are, not even into the third quarter. So, we feel comfortable with this. If we felt -- maybe at the end of the third quarter, if things continue to surprise us -- the Company is getting stronger, and we would reflect that in a change in guidance in the third quarter if appropriate. Matt, do you have anything you could add to that?

Sure, I would mention a couple of things that we're thinking about. I think that there is a sense in the business across the board of some concern over second half business levels. We have not seen anything but acceleration, as I mentioned, in all key markets throughout this year. But, there is less comfort level at the business unit level that we're going to continue to see that as the year goes on.

I don't know if that's politically motivated. I don't know if that's -- doesn't appear to be in the order book, but I would say that there is some concern at a gut level that the acceleration particularly here in North America could be slowing. But, we do not support that necessarily in our revenue thinking, but it's just a concern.

Secondly, in each of our businesses, particularly supply tech, though, and to some extent, aluminum products, as well, ship days are important. Really, traditionally, we've seen a slightly weaker second half because there's less ship days. Certainly, with summer vacations, which are getting back to more typical of what we've seen years past, the holiday season, it is not atypical for us to see a little bit of softening in the second half. Given the operating leverage in our businesses, that can be a little painful at the earnings line.

And then, thirdly, I think that the combination of new business and expenses related to that at aluminum products as well as just the uncertainty of how that's going to perform, particularly in the fourth quarter, has been really difficult for us to get our arms around. So, we felt that being a little conservative was the sort of better part of valor here, and that's where we are.

Okay. And then, just two questions for Jeff - Jeff, CapEx and D&A for the year, and what's the status of registering the notes that you issued?

Well, we'll start with the notes. That was filed and is active. So, they are registered. The notes are registered.

Okay.

For D&A for the year, we're looking at just a little over 15.

And how about CapEx?

CapEx, we are looking at -- for the entire Company, so for -- at a holding company level. This is not Park-Ohio Industries -- at the holding company level where we have -- we buy some equipment and then lease it to industries, we're probably looking at somewhere in the $10 million range. Industries will be a subset of that, maybe in the 6 to $7 million range.

All right, so I'm little confused. What's the CapEx that you actually report, like what -- that goes through your cash flow statement?

For holdings, it'll be $10 million.

Okay.

For the bondholders and industries, it'll be 6 to $7 million.

Okay, got you. That's helpful. Thank you.

Thank you.

The next question comes from the line of John Baum.

Hi, guys. How are you doing?

Fine, John. How are you?

Good, good. Great report card - sales, EBITDA margins were great year-over-year and certainly quarter-over-quarter, and cash flow looks strong. So, again, from a long term shareholder, we appreciate it.

Thank you.

Quick question here - on full year taxes, Jeff, cash taxes, is that $2 million provision for the income tax associated with the refi, is that going to be cash taxes or GAAP taxes, and do you have an estimate for full year cash taxes?

Yes. The $2.1 million is for the bonds that we held in Ireland. And when we decided not to trigger US taxes on those bonds and to pay them off and to hold that cash in Ireland, the $26 million, we're going to pay taxes in Ireland of -- and that's going to be cash taxes -- $2.1 million. So far, we've paid in US dollars about $700,000 of that $2.1 million.

So, taxes paid through the first half were approximately $1.1 million excluding the Irish taxes. And that should be indicative of what we're going to pay for the year. We're going to pay somewhere in the mid 2s to $3 million for the year of taxes paid.

Okay. How about the NOL carry forward going into 2012 if you're looking at roughly the same level of business? Are we -- is it too difficult--?

--We're good through '12.

Okay. All right. And it may have already been answered, but the guidance again that you have, is that guidance based upon your current -- is that with or without the loan refinance cost?

That's without the loan refinancing cost.

Okay. And, Eddie, I guess I'll just kind of pitch it back to you. I know CEOs are a little bit conservative right now, both as to future business, but what are you seeing as you take a look into 2012, both domestically, internationally for the three silos, maybe especially aluminum products going forward, if you can comment on some of the domestic auto and maybe a little bit of commentary on headcount, too, but I'll leave it open there, and that's my final question.

Okay. Headcount - let's just start with the last thought. Obviously, the numbers are reflecting a tremendous amount of velocity through our operations without increasing the headcount. And that seems to be something that we're going to be able to maximize through the balance of this year and into the future. The productivity in our plants on an individual basis is quite remarkable, and that's across the board and it comes on different ways, in the aluminum when you're on the factory floor versus in the offices.

But, the productivity and the morale at the company is very high in light of the pressure everyone was under here through the crisis. So, we're -- number one, we feel very good about that.

Secondly, as far as the businesses are concerned, the capital equipment business should follow what we anticipate, is a growth in the future. Again, you can only run the pipe mill so long and the equipment so long before you have to replace it. So, the maintenance curve in our capital equipment business is way beyond in the parts and the service and the new equipment replacement. So, I'd say, in that area, a sustainable three to five year curve that will be very, very strong. So, that particular silo is going to speak for itself and do very, very well - oil, gas, steel and so forth.

Supply tech - supply tech I think is -- future's never been rosier. We just have engaged for the first time an individual with deep experience, international experience, and we are aggressively going to be pursuing taking supply tech and its capabilities, our systems around the world, particularly into Europe. That is a targeted effort for the next two or three years. We have engaged someone that we feel can bring us the experience and bring us access to accounts in Europe. That's a strategy there that I think will really open the door to a value creation for supply technologies.

The aluminum business, which is, as you know, very involved in, things look very strong. As indicated, the number of individuals that are in our business have been dramatically reduced. The number of cars have been increased. I am pleased, and not to capitalize on any particular issue, but a -- there's been a real lesson here relative to particularly the foreign companies producing and making cars in America and bringing parts back here from around the world.

So, we are -- the inquiries relative to supplying parts to foreign car makers in America is very, very strong at this point. And we've never had more meetings and more consultations with foreign car companies than we've had in the last six or eight weeks.

So, we feel good about that. As we talked before, once we can hopefully get that revenue of a couple of hundred million dollars of our $350 million in imbedded capacity, we'll have all the ships cruising at the same speed. So, we've got a lot of opportunities. The company's very disciplined. We're proud of what the employees have been able to do from productivity. So, right now, it's been a tough couple of years, but we're ready and we'll do well. We'll just do extremely well if we get a little revenue or a little wind in our back.

Is that enough of an answer?

That'll do it. Tremendous--.

--I don't want to wear you out, John, but -- never ask me to talk about my favorite subject.

Okay, Eddie, that's why I throw you the pitch. So -- no, great quarter, and looking forward to a good second half. Thanks, guys.

There are no further questions at this time.

Well, great. Thank you very much. We appreciate the continued support across the board and we're working hard here to make all our stakeholders proud of what we're accomplishing. Look forward to speaking with you again at the third quarter. Thank you very much.

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