Park Ohio Holdings Corp (PKOH) 2012 Q1 法說會逐字稿

Good morning and welcome to the first-quarter 2012 results conference call. (Operator Instructions). 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 the 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 2011 10-K filed with the SEC on March 15, 2012. The Company undertakes no obligation to update any forward-looking statements 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 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 facilities. For reconciliation from income before income taxes to EBITDA, please refer to the Company's current reports 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. Gentleman, you may begin.

Good morning, ladies and gentlemen, to the first 2012 conference call of ParkOhio. We will be beginning with addressing our first-quarter financial results and operations. May I introduce first Matthew Crawford, President and CEO of the Company. He is sitting on my right. On my left we have Pat Fogarty, who is a 17-year veteran of ParkOhio. He is serving currently as Interim CFO. Matthew?

Thank you very much. We were pleased with acceleration of our business throughout the beginning of 2012. Revenue increased 9% from 2011 with particular strength in Supply Technologies and the Manufactured Products segment.

Earnings per share was $0.74 versus $0.73 last year. This improvement is understated relative to the current performance given the now fully tax nature of our earnings. As articulated in the earnings release, a fully tax comparable EPS for 2011 would have been $0.58. This 28% increase in EPS, we believe, is indicative of the earning power of the Company.

EBITDA also expanded 14% to almost $24 million.

The big news for the first quarter was the acquisition of FRS. We are excited about the addition of the FRS team and believe that FRS has added an independent platform for growth, given the strong management team and significant organic and strategic opportunities.

Additionally we are excited -- or, excuse me, executing an integration plan which we believe will provide near-term revenue synergies and opportunities.

Now let's look more closely at the first-quarter business segment results. In Supply Technologies, revenue increased 9% compared to the same period in 2011 and 13% sequentially above the fourth quarter. Very strong demand in the truck, electrical, recreational equipment and auto markets, combined with ongoing penetration into consumer electronics market, led the way. Our initiatives to grow our support to our customers in key overseas markets also continued successfully. Operating profit grew to 10 points or about $10 million, an increase of 17% from 2011. This also represents a multiyear high in the Supply Technologies segment operating profit. These earnings represent a 7.5% margin, which was achieved based on a good product and customer mix, combined with focused expense management. We expect Supply Technologies to continue to have a strong performance in 2012.

Now looking at Aluminum Products and FRS, revenue was $36 million, which included a stronger performance from OEM autobuild rates. The second quarter of 2012 will be the beginning of the aforementioned product launches, which will benefit the top line meaningfully as we get into 2013. Operating profit was $1.1 million.

Looking at Manufactured Products, revenue improved 17%, supported by strong demand throughout the segment. Our industrial equipment business continues to benefit from strong backlog built throughout 2011. The equipment group also saw increased orders in the first quarter, which were 19% greater than the first quarter of last year.

Aftermarket revenue also continues to be strong. Our forged division continue to see strong performance led by the rail industry.

Operating profit also achieved a multiyear high benefiting from significant operational leverage, as well as improvement in efficiencies in our forged and rubber groups based on our investment in manufacturing and employee training processes. While the first quarter was an excellent quarter in this segment, we believe the fundamentals are in place for continued improvement through 2012.

CapEx was $2.8 million for the quarter. We expect CapEx still to be approximately $15 million, but recognize we are seeing significant growth opportunities throughout the Company.

Cash flow for the quarter was a positive $14 million, adjusted for the acquisition of FRS. In closing, the momentum in our business appears to be very good and largely broad-based, which allowed us to exceed our internal plan for the first quarter. With this in mind, we believe we will likely exceed our prior revenue forecast and are also increasing our earnings per share forecast to $3.10 to $3.20.

Thank you.

Thank you, Matthew. I would like to open up the lines now for any questions.

(Operator Instructions). Michael Corelli.

Congratulations on a great quarter. Just a couple of questions. First, FRS, I know it closed pretty late in the quarter, and I know this may not be something you want to do on a regular basis. But could you just give us an idea of what kind of revenue and what kind of operating income impact it had in that short bid that it was in the quarter?

It really was not material on either category so late in the first quarter.

Okay. I am assuming it did not have any positive operating contribution. I know there is purchase accounting and all that stuff so that the fact that you returned to profitability in the Aluminum Products was driven by its core business and not anything to do with the acquisition?

Yes.

And so as far as the Aluminum Products is concerned, do we expect to see an improving trend gradually going forward, or will there be some fits and starts related to different programs and things like that?

Well, we are at what I call the wall or the turn. Finally, we are in the process of the first and second quarter this year going into the $90 million plus in new orders written in the last 12 months, $90 million across our platform.

So we have come through this storm in my opinion, and the Aluminum business, as I have been talking about for a year, has been more painful. It has taken longer to get to the turn. But we are in very, very good shape. So I think starting as we discussed before, in the third quarter if not sooner, the new business is ramping up. We are beginning to ship as we speak. So you are going to see some important changes in that sooner rather than later. In fact, we are a little bit ahead on the turn than we expected.

Okay. So -- (multiple speakers)

Yes, I think the Aluminum business, or that whole particular segment, should look stronger each quarter for some time.

And that is exclusive of the FRS you are speaking of, right?

Yes.

Okay. And then as far as the Supply Tech and the Manufactured Products, is there anything you are seeing today that would make you cautious that this great momentum would not continue?

No. I will refer to my comments, into my prepared comments. No, Supply Tech looks pretty good. The revenue improvements have been broad-based, come from a number of different sectors. Most end markets have improved year over year. So while we are seeing an excellent customer mix with some of our largest customers really providing some of the biggest lift, it is not an isolated driver. So we feel pretty good in Supply Tech about that and have some confidence that it is going to continue to perform.

In the Manufactured Products segment, the two biggest businesses there, first being our industrial equipment business, as I mentioned in my comments, really we are seeing the revenue line, some of that backlog that was built through 2011, and yet we continue to build on that with a superior bookings period in the first quarter of this year. So that is probably for that segment the single biggest indicator going forward, so that bodes well for the rest of 2012.

Our forged group focused mostly on aerospace, but then also largely on rail. But locomotive and car is doing very well, not only in terms of the revenue line, but also has benefited at the margin line from not only operating leverage but also from some investments that we made in some new equipment, and we have also employed some new lean manufacturing techniques that have paid off as well. So we are feeling pretty good about both those segments right now.

All right. And then just lastly about the CFO position, I know Patrick is the interim CFO. Is that -- is he possibly going to become the permanent CFO, or is there a search ongoing? Is there any kind of a target time period for naming a CFO?

I will take that one as well. We are fortunate to have someone of Pat's caliber able to step in here, so we don't miss a beat. Pat, I think as you know, has been enormously helpful in the really strategic part of the business, both from aiding and assisting the organic growth of the business but also from an acquisition perspective. He has demonstrated an interest and we have an interest in seeing him continue in that role. But having him here has allowed -- as someone who is intimately familiar with our business, as well as his background at Ernst & Young as a CPA and an auditor, really allows us to run a very patient process and find who we think is a great fit for the culture of our business.

So no, it is our intention to find a good, long-term fit, but we certainly appreciate Pat offering to do it in the meantime.

[Richard Karf].

Congratulations on the quarter. Real quick, you kind of touched on this a little bit, but I just wanted to ask a little bit more on the -- the Manufactured Products, you really had great performance there. I just want to see if there is anything unusual in the quarter, any pull-throughs, any shipments that may have happened this quarter? Anything that maybe gives you a little bit of a boost in the quarter?

What is great about this particular segment and looks bright for the future is we continue to have not only new equipment sales, but our -- as we have always talked about are the tail, the parts and service that follows business is extremely strong. Many companies have laid off or laid off in two- or three-year period in rebuilding or committing CapEx and maintenance to their equipment. They are sensing a possible increase in volume, so it drives that part. And that part looks very strong for a considerable period of time as people begin to feel that, particularly in North America, it is going to ramp up.

I would add only one other thing. There is no particular segment we have that is more vulnerable or more volatile in margins than this group. Fortunately it comes from a very high base, principally because of the aftermarket business has been described.

But the reality of it is every quarter has significant equipment orders that come through that can impact the margin in a very positive way or perhaps even as a slightly new lower margin mix. So while we feel very good about the direction this business is in from a booking standpoint and from a revenue standpoint, we also recognize that this margin can jump around a little bit based on orders that flow through.

Got you. Sounds good. And then on Supply Tech, again you mentioned the multiyear high there for margins. On a long-term basis, what is the potential there? Do you see going forward a continued trajectory going up, or what do you see there?

This is Matt again. I would tell you that this is a really good margin quarter. Our goals exceed a 7.5% margin. But having said that, we saw really robust activity at some key customers that provided some real operating leverage. So some stars aligned here to hit that margin, but that does not mean that that is not achievable or that even higher than that is not. But there were some stars that aligned in the quarter, not in an unusual way, but just in sort of the right customer mix at the right time.

Got you. Thank you.

Also, I would draw your attention to the fact that the first quarter does have the greatest number of ship days as well. So it provides us an opportunity to leverage some of those overheads slightly better than some of the other quarters.

Got you. And then on the account end, is there anything in the quarter with that or anything you can talk about with some of your international expansion objectives?

Yes, we are still early in that process. As you know, we do a significant amount of Supply Technology business overseas. We are really what I would call in the transition period from simply taking business that our US-based customers want to give us in those foreign operations and building an infrastructure both from a physical footprint standpoint and a people perspective to attack those markets.

So our wins so far in those markets as being more locally oriented have been minor at this point, but we are certainly investing the money to build a platform for success in the future. So nothing I would bring to your attention right now.

(Operator Instructions). [John Baum].

Great quarter. Good to hear from you. Let's see I have got a housekeeping question here and then a little broader-based question I will throw to Eddie, I guess.

So housekeeping, I know we are looking at fully taxed earnings this year, but I know there was a little bit of net operating loss and other credit carryforwards that was in the K. Do you have a figure as far as for federal income taxes when they become fully taxable on a cash basis not a GAAP basis for this year?

This is Pat Fogarty. We are estimating right now that the NOLs would be used up sometime in the third and fourth quarter and then are estimating our high cash taxes paid to be about $12 million for the year.

About $12 million for the year? Excellent. Okay. Eddie, I have often referred to long-term shareholders just like a 12-piston engine. When all the pistons start firing together, like it seems like they are doing right now, it's going to be a heck of a run.

When you look at auto and you look at industrial right now in your key areas, it is Aluminum Products, as well as Supply Technologies. So any idea how long this run could go in terms of auto, and is the vector still pretty positive right here taking off, especially for Aluminum Products? And maybe you could touch a little bit about what you are seeing in Europe. Thank you.

Okay. Let me address Europe first. We have been very close in looking at Europe, particularly from the Supply Technologies business, and we have done soft on that in the last six months. We don't want to really get mixed up on what is going to happen over there. So we have slowed down our engines a little bit relative to taking Supply Tech or [Oscar] to Europe. And from an international viewpoint, there is a lot to be seen over a considerable period of time.

So that is one -- that is where we look at Europe today. Although we have a lot of very good business there, particularly in Germany, in the aftermarket in service and parts of our Manufactured Products unit. So right now virtually all of our real concentration in Europe is in Germany, so that is where we want to be. And, of course, we have Belgium where we have our Pipe Machinery Company.

As far as the outlook, we are pleased about the auto industry and the number of cars. I'm more excited about the fact that we were hoping the number of qualified competitors for the supply base has dwindled, and I think the strongest thing that is happening over on the aluminum side is we have actually taken a knuckle away from a Korean company that was in iron and is now, as part of the portfolio of $90 million, is now being manufactured in the US in aluminum. So there are some good things happening there.

But the one thing -- let me take this opportunity -- I want to clear up the vision of this FRS. Don't be looking at FRS as just an automobile play. Don't think of it just as in the automobile segment. You have to think of the following. We see we bought it obviously we think at a very desirable number. But the potential here is how it will affect our other divisions is very important. There is [disk] product lines and the products they make currently, FRS, will have an impact and are portable from the same point they can be sold to some of our current customers in Supply Tech field.

This is a very important consideration. It should be able -- we should be able to grow the Supply Tech or the [IRS] Supply Tech side of this business through products that we will manufacture over in FRS.

Secondly, it also helps with the fact that the major customers over there are the big three, are the auto companies, are the Toyotas, and enhancing our relationship with them at the level we are talking about will be positive. And then, of course, our rubber business.

So FRS, we are very optimistic, not only about the product lines that exist in the past history, it is how we can affect some of our internal divisions. That we did not pay anything for. That we got for free. And when you think back on the five and a half months it took us to make that transaction, it was about evaluating -- it was clear became a great management, and they are still there. They are running the Company. But the opportunity is not only in growing that organically, more important we have spent the first 90 days of that being part of the stable and trying to determine how this would and how it could impact the rest of the Company.

So the main FRS should not be thought of strictly as an auto play. It should be thought of as products that can bring and enhance two of our three major divisions. So we think this whole area we are comfortable with it. It has been a long, difficult turn, but we are there, and I see a lot of positive long-and short-term effects of this acquisition on the Company.

Excellent. Thank you.

Michael Corelli.

Just the numbers question. Now with the acquisition of FRS, could you give us some guidance that we should look at depreciation and amortization for this year?

Sure. Our current run-rate relative to depreciation and amortization without FRS is about $14 million, and we expect that the current year the FRS amortizable goodwill and fixed asset depreciation will be about $3 million. So we are looking at about a $17 million depreciation and amortization amount this year.

So FRS is basically adding $1 million a quarter?

For this year, correct.

There are no further questions.

Well, thank you very much. We had a good start, and we look forward to speaking to you at the end of this quarter and with some optimistic views of the balance of the year. Thank you and have a nice day.

Thank you for participating in today's conference call. You may now disconnect.