Park Ohio Holdings Corp (PKOH) 2011 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and full-year 2011 results conference call. At this time, all participants are in 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 the Company's 2010 10-K filed with the SEC on March 9, 2011. 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 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 a reconciliation from the income before income tax to EBITDA, please refer the Company's current report on Form 10-Q furnished to the SEC on November 9, 2011. Now the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer. You may begin.

Good morning, ladies and gentlemen, to the 2011 financial review of Park-Ohio activities and Industries. I'd like to turn over the microphone to Matthew Crawford, the President and COO of the Company, to review the 2011 results.

Thank you very much, and good morning. I will focus my report principally on the Park-Ohio performance during 2011 in the fourth quarter and reserve further discussion on the FRS acquisition until later in the call. 2011 continued our Company's resurgence, as almost all of our businesses improved relative to 2010 performance. Highlights included 19% revenue growth, 117% growth in earnings before one-time charges, EBITDA at Park-Ohio Industries exceeding $80 million, the successful placement of $250 million worth of 10-year, non- amortizing notes at a coupon of 8.125%, and cash flow before debt refinance charges of just over $25 million. Looking at business trends in the fourth quarter specifically, Supply Technologies revenue grew by 12%. Heavy-duty truck continued to lead the way, with Power Sports, automobile, and industrial equipment contributing increases in the growth rate as well.

Looking forward to 2012, we expect this trend to continue as we focus on three important growth areas, growing international business with customers, who we already support in North America, which have grown rapidly in foreign markets where we already have a presence. Number two, focus growth in the contract manufacturing end market, which is seeing significant acceleration and has a proven need for our service. Number three, increasing penetration of newer product categories across our customer base, most notably, precision machine components, labels, and now, through the addition of the FRS, extruded hose. Earnings during the fourth quarter at Supply Technologies increased just over 16%, due largely to continued operating leverage enjoyed with the return of more historic sales levels. General Aluminum sales and earnings in the fourth quarter were impacted negatively by customer production schedules during the holiday season and with new-product launch costs, which occurred as General Aluminum prepared to ramp up for over 15 new production parts during 2012. We believe the fourth-quarter sales and earnings represent the low point in the near term for GAMCO. We continue to remain optimistic about GAMCO's future, as new business activities and bookings continue to be strong in all of its major processes.

Turning to Manufactured Products, revenue increased 14% year over year. Our industrial equipment business showed a 33% increase in bookings versus 2010, and the fourth quarter had continued momentum in all parts and service. Additionally, locomotive and rail car both continued to show strength. We anticipate a continued rebound in 2012 for this segment. Earnings increased 50% to just under $12 million during the quarter. We benefited from strengthening product mix, particularly in our forge business. As volume approaches more historic levels, this volume will continue to disproportionately benefit this segment, given its substantial operating leverage.

CapEx ended the year at $11.4 million, slightly better than our estimates -- or slightly lower, I should say, than our estimates. We expect 2012, including FRS, to be about $15 million. Cash flow for the year ended at $25.2 million before refinance charges. We expect a similar cash flow number for 2012, including FRS. Net debt decreased again in the quarter to about $270 million.

In closing, we're pleased with the continued success of the Park-Ohio story. 2011 was a year in which we completed the restructuring of the business, which began in 2009. We headed into 2012 with a strong balance sheet, strong cash flows, and a solidly diversified Company. FRS, which will be accretive immediately, is an excellent addition on all fronts. We are excited to resume our growth initiatives. As such, our revenue forecast for 2012 is $1.15 billion. Our EBITDA target is $105 million, and our EPS range is $3.00 to $3.10, all of these estimates including FRS. Thank you very much.

Thank you, Matthew. Let me take a few moments and explain the thought process around the acquisition of Fluid Routing Solutions. This is a project that we worked on for over five months, and we decided to go forward this particular transaction based on some very important availability of customers. These are very important aspects for the Company short term and long term. Number one, expand customer base. We've had, in the auto sector particularly, a very strong position with Chrysler, but this one will increase our relationship with Ford.

It will have a major effect on our overall business model with General Motors and will bring to us a new and large account, Toyota. These are the type of customers that we like to do business with. Everyone is pretty optimistic about the next three years in the auto business and truck, particularly the light vehicles. There's a lot of optimism in that particular sector. We share that with our aluminum division. And most important, this is a company that has a proven record of cash flow, and we think that this acquisition is a value purchase of assets with considerable growth potential.

This is a company that we feel not only we can grow with their current customers, but a very important part of it, this is two-segment business. One, a fuel filler business, which is primarily anchored in supplying all the fuel filler components to a majority of platforms and our customers that I've mentioned, and the industrial, extruded, high-performance hose business. We like this area. We like it very much. We have a great market entry to supply technology. And there isn't very many, but most of our customers that we're currently supplying in supply-chain management, the point-of-use concept, use the type of hose that we are manufacturing currently in this Company.

Yes, it's subject to Hart-Scott approval. We think that'll come pretty easily, but this is a company -- it's our customers. We understand this market. We are able to bring to our new supply-chain management customers considerable new opportunities relative to the hose they use. If you're building a lift truck, you're using a lot of the hose we can manufacture. If you're building recreation vehicles, the same. So, we've explored this with our customers. There's a tremendous interest in us being there in this field, able to make product for their production lines. Again, this is a very successful business, but we're really interested in the revenues this company will present, or the opportunities for the revenue enhancement this company will present to us in the next three years. And I thought I'd have Jeff Rutherford, the CFO, describe basically how we set the transaction up relative to our relationship with a very supportive bank group.

Thanks, Ed. As we disclosed, we will finance this transaction, when it closes, with cash and bank debt. Let me walk through very quickly how we're going to do that. If you look at our cash position at the end of the year, we had $78 million in cash. $61 million of that was international, and the remaining parts, like $17 million, was at Park-Ohio Holdings. But what we're going to do is we're going to drop $10 million of the Holdings cash down into Industries to service that equity for the transaction. Then we will loan $30 million from our European treasury company back into the US as a note subordinate to the bank debt. That's important to note that this is not a dividend back into the US. This is a loan into the US, and it will be interest-bearing and amortizing. We're modeling it on a seven-year amortization today. From a bank debt perspective, we will utilize $35 million of our current revolver, which is at, as a reminder, is at L plus 1.75%. The borrowing base that we'll bring in from FRS transaction will supply a majority of that $35 million of borrowings, but there will be some use of availability.

And then we're going to add on a $25 million term debt that'll be at L plus 2.75% that will also have a seven-year amortization. That'll be collateralized in the machinery and equipment and certain real estate of Industries, so similar to the term-debt structure we had just three years ago. So it's all that, the $100 million of -- we rounded up. That's $100 million of availability and cash to do this transaction. We ended the year with availability under our revolver of just a little over $60 million. That's actually up based on today's borrowing base and today's borrowings. We actually had added in the last couple months another $10 million to that availability, so we have sufficient availability. We have sufficient cash. We structured so that there isn't any significant tax consequences of loaning that money back from Europe. As Ed mentioned, we had very strong support from our bank group to quickly approve this and finance this transaction.

Thanks, Jeff. Appreciate that. Now I'd like to open the lines to discuss the 2011 operating results of the Company and any questions on our FRS acquisition.

(Operator Instructions) Ajay Kejriwal, FBR & Co.

Good morning. Congratulations. Sounds like a very nice, complementary acquisition with FRS.

Yes, I -- it fits in very well.

Yes. Yes, so maybe if we can start a little bit, talk a little bit more on the synergies and the opportunity that FRS brings in terms of what could be doing with their products with your existing customer base? And then, vice versa, what's the opportunity with their customers? I know you talked a little bit about Ford and Toyota, but what that could mean with some of the products that you already have in your portfolio?

The products that we have in the portfolio, for example, in the auto sector, obviously, this is going to enhance all our -- these major companies', auto companies' growing interest in the aluminum side of the business. These are the customers that we are currently selling and would like to sell more to. So it will appear to them, Ajay, as the Company is committed to being in the auto sector as a major supplier across numerous platforms. We're stepping out in the aluminum business, and a smaller degree, the rubber business with Park-Ohio Products, and stepping into becoming a more important supplier to each one of these customers. And there's not one of these customers, because on the fuel filler side, it's a pretty narrow market.

There are really only three people that make the -- and when I talk about fuel filler, I'm talking about the next time you get gas, and you put the -- and it's self-serve, and you put the gas-tank lever into the pipe, that's what we're talking about. We're talking about the fuel systems from that part. That's where we are positioned in all these autos, in Toyota, all the companies. It's a very, very important supply base. It's a narrow supply base that it gives us an opportunity. And because there isn't one customers I mentioned on the auto side that this does not have -- bring us up to a very, very high profile as a supplier and enhances the value to them of General Aluminum and in parts of the current business that we are supplying to them out of those particular platforms. That's on the fuel filler side.

The more interesting side to us is the industrial hose side, which is 50/50 in the business. This company extruder rubble hoses, are able to do all types of bending. And for example, the hose that we will be supplying in this company -- with this company to people when it comes to the turbo charging, which is become a very important part of increasing the performance of the lower-horsepower engines. So it puts us directly into, not only on a fuel filler side, we're on with those customers on supplying them hoses for automobiles and trucks. But when you step out, the biggest opportunity for us in the industrial hose business, which again, is a driving factor here, is that every one of our virtually 75%, 80% of our current customers oversupply tech. And you know the customers. You name them. They're manufacturing elite in the world.

And we went out and sampled just three or four of those major customers very quietly over the last five months, because we've had to be very sensitive about this particular acquisition, and there's not one of them that does not buy considerable amount of the product that we can make in the industrial side. So we look at this as an opportunity, again, not only to grow with them, but to grow with everyone, with our customers and recreation vehicles, and lift trucks. Everyone that makes a lift truck in a factory has all types of hoses on it. Now we have had no access to that market. Not only will we be selling it, we'll be manufacturing it.

So it gives us a lot of leverage. You know we know all about how to buy couplings. So this is an exciting part of the business. It's going to definitely drive the revenue side of it. But supply tech, we have introduced this concept, this idea of supplying the hose to two or three of our major customers, and every one of them said fine, it sounds exciting, let's go forward. It hits across many platforms. And one additional thought is there are already a content of aftermarket business here in the industrial hose. They make industrial hoses, they package them, and they sell them in truck stops and all of the repair shops. This is a part of the business we really like, really understand and where our supply-chain management company will be particularly effective.

Excellent. Any color on the aftermarket versus OE split? Sounds like it's a nice opportunity for you to build into that aftermarket space.

Let's put it this way, it's -- the fuel filler and the current industrial business, consider that 50/50 in the volume. And let's say there's 3% or 4% of the aftermarket. But this company was going in the right direction. One of the problems is they were getting -- they had difficulties getting access to the markets, to the customers. And you can see supply technology comes into this, but the aftermarket business is something we will concentrate on, and it'll be a bigger part of this platform. In fuel service, as things change, as hoses change, or the more performance in the engines are required, the more complicated the hose can be made, and you don't just go in this hose business, okay? It's lots of certifications and high-performance, but the aftermarket is -- nothing will grow faster in this particular company than the aftermarket, but it's still -- it's got a long way to go to catch up to the others.

Excellent. And then any thoughts on cost saving or margin opportunity? Anything you could be doing with sourcing?

We've looked at the sourcing. This is a very -- it's run by a very sophisticated, experienced management team. Quite frankly, we like to go in, and you've heard me say before, we like to go in and find things we can improve and things that could have an impact on it immediately. There's a little of that, but this is a very well-run Company. It's very successful. It is not broken. This is, for the first time, we like the idea of buying the stable assets, turning them around, and turning them into cash-flow companies. This is a great company already, okay? We think it's a tremendous value purchase, and more important, this is a growth opportunity.

This is a company that can drive the Company in the future relative to growth because it's got so many platforms to go with, particularly in the industrial hose side. It's not broken. I would say that this is a very good Company run by great management, and the long and short of it is we think we got a value purchase here, and assets that have tremendous potential growth in revenue enhancement. That's what -- we're pretty cautious about things like this, but yes, we'll buy a very good company, pay a fair price, particularly if it has a lot of growth possibilities. That's what we are really interested in here. Quite frankly, that's what drove the decision. We would like to see the revenue in the company grow over the next two or three years, and this is a place that can do it safely with free cash flow.

Thank you. One just last one from me, and then I'll get back in line. In your EPS guidance, what are you assuming for FRS in terms of accretion in that $3.00 to $3.10 number?

Ajay, it's Matt. Typical of how we've approached our business in the past, we're not going to give guidance on individual cycles.

FRS, is that going to sit in Supply Tech, or are you going to create a separate -- how's it going to be reported?

We're not committed to anything yet. We anticipate is that we'll combine it with General Aluminum, with the aluminum products group but create a separate segment for the automotive group.

Make sense.

Ajay, this is Ed. The -- obviously, the aluminum business is a current segment. This will fit very nicely together with it, and the segment will, just by the nature of it, grow in size and grow in cash flow, and more important, grow in importance as a segment within the Company for the customers. They will like the size of this. They will like the management, and the two companies fit together very well, and that's the thinking at this point.

Excellent. Thank you.

Michael Corelli, Barry Vogel & Associates.

Good morning. Just following up on the FRS, can you give us any kind of color of what kind of multiple of EBITDA you might be paying or how we should be looking at their margins, or what kind of sales you might expect out of them in 2012, or anything to that effect?

Yes, Michael, from a sales perspective, what we model into our guidance is closing of this transaction as of the end of March. So effectively picking up three quarters of an ongoing sales number that we provided. As far as our earnings, it's built into that number that Matt gave as far as guidance for 2012.

All right. So you're not going to give us any additional color?

The FRS achieved revenues of approximately $190 million. That's in the release. So that's the revenue side of it.

Okay. But nothing on the margins?

Not at this time.

Okay. All right. Maybe we could talk a little bit about what's going on in aluminum products? I think the loss in the quarter was a little bit larger than what I had been given the impression I might be in the fourth quarter. Could we talk about how that might play out in 2012? I know FRS will be integrated into that segment it sounds like at this point, but $2.9 million loss was higher than I expected in the fourth quarter. So how should we be looking at that going forward, and what led to that loss being that substantial in the fourth quarter?

I share your opinion that we're behind our plan on that particular division. But before I comment on it, I want to point out that this company in 2010 and 2011 has created free cash flow for Industries of $13.803 million. So this is not a broken company. This is not hurting us. It's just not reaching its expectations as quickly as we thought. What we have is all the platforms that we talked about, which are numerous, more than five, are still on stream. There has been a series of slow-down, the one particular part had to be re-engineered. We're frustrated as could be, because we're all set to go with all the platforms, and they're, quite frankly, about six months behind. So where we expected to get some help in 2011, it hasn't arrived yet. That doesn't mean that it's not, but while we're waiting for it, and a substantial increase in revenues over the next three or four years, and increase in EBITDA, we have the business. We've spent the money, just like anything else.

As you probably realize, there are more new cars coming out, and they're changing cars, and the Koreans are now making -- they're being forced to go from iron knuckles to aluminum knuckles. There's a lot of movement in this particular industry in the supply base, and we're just six months behind where I thought we would be, but that doesn't mean we've lost any initiative or any ground towards the revenues and enhancement of EBITDA that we expect, just late. There's no reason other than it's late. We're carrying the full cost of being ready and being up and being able to mix and produce the products, and they're coming, but a lot slower than I'd like. There is no answer, no excuse, other than the fact is we're ready, we spent the money, we've got the people, and we expected to be running at a higher rate. We've employed the people. We've got a little shortfall here between the revenue and our cost, so that's how it's hurting us.

Any thoughts at this point how it's going to play out this year? Again, I know that the FRS will be integrated with it, but the aluminum products itself at this point. Do you think it's actually going to have an operating loss this year based on these delay?

No. No, it won't. Number 1, it didn't have an operating loss. It had an EBIT in 2011. It had an EBITDA in 2011, so it had free cash flow in 2011. It's making less EBIT and less EBITDA than we anticipated, but it's not hurting the Company. It's not losing money.

So you expect positive EBIT this year?

Pardon?

You expect positive EBIT this year?

Yes, we do.

Yes.

Okay would imagine you will have the losses early in the year?

It'll ramp up during the year, but they're doing everything they can to mitigate any type losses. We had some costs come through at the end of last year, some residual out of some platforms that we had converted off of in the holidays. That's right. And the shutdowns in the fourth quarter. The fourth quarter turned out to be a little worse than we had forecasted.

Okay. All right. And then Jeff, a couple questions for you. One, how should we model book taxes, and how should we look at cash taxes, you think, in the new year?

We're finally going to be able to make book taxes a little easier for everybody to understand. As you can tell from the release, or maybe you couldn't tell from the release, but you certainly pick it up in the 10-K, that the years of not recognizing US taxes. The good news and the bad news is it's coming to an end, right? So we're going to start paying US taxes in 2012. At the end of 2011, we reversed out the final portion of the valuation reserves for the net deferred tax assets. So beginning in the first quarter, we'll be recognizing a normal tax provision for book purposes. We are modeling without FRS at 36%, with FRS at 37%. That's all contingent upon the mix of US to foreign income sources. What I'll tell you is to model it at 37% and then subtract out $5 million when you convert from book to tax payments for what's left over of the NOL.

Okay. So your cash taxes on the full year will be about $5 million less than your book taxes?

Yes. There could be effects from deferred taxes, but that's the way we're modeling it, is a pretax income at 37% to get to book tax provision, less $5 million to get to taxes paid.

All right. So that $3.00 to $3.10 you're using includes that 36%, 37% tax rate?

That's right. That's right. And obviously, our tax rate historically has been much, much less than that because we do not recognize book tax provision on US earned income. If you went back and you pro forma 2011 for 36% tax rate, we're at $2.00 a share. So there is some significant growth built into that, not only from the FRS acquisition, but from our legacy of businesses to grow on a pro forma basis from $2.00 to $3.00, $3.10.

Okay. As far as interest expense, how do you think we should be looking at that going forward?

Yes, let me tell you what we're modeling in cash flows. As Matt mentioned, we're looking at $105 million on EBITDA, $26.5 million, approximately, on interest, $15 million, $16 million on CapEx, taxes paid around $16 million, and working capital around a $15 million use. We're looking at somewhere in the $25 million to $30 million range, as what we define as free cash flow, which effectively is the change in net debt.

Okay. So as far as the free cash flow, that might be used to pay down debt?

It depends where the source is. If it's US, it will go initially to pay down the revolver, but we will have amortizing debt. On the term debt, it'll be seven years, and our own debt will be seven years, and we have some options, obviously, relative to our own subordinated debt. As if it's a foreign-sourced cash flow, it'll remain in our treasury company in Europe.

Okay. All right. Well, good luck with the new year. Hopefully you can hit those targets. It would be very good year if that were to occur.

Thank you very much.

Thank you. At this time, I would like to turn the call back over to Mr. Crawford.

Ladies and gentlemen, I want to thank you for -- as I said, all the stakeholders.2011 was a great year for the Company. We expect to have a very positive year in 2012, and most important, we believe strongly that the new acquisition, FRS, will be something we will be talking about, because it will really affect the revenue enhancement for the Company over the next three or four years, and that's an important part of growing our -- the value of the Company for everyone. Thank you once again. Have a nice day.

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