Park Ohio Holdings Corp (PKOH) 2012 Q2 法說會逐字稿

Good morning and welcome to the second-quarter 2012 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 2011 10-K filed with the SEC on March 15, 2012. The Company undertakes no obligation to update any forward-looking statement whether as a result of new information, future events or otherwise.

Additionally, the Company may discuss EBITDA. EBITDA is not a measure of performance under Generally Accepted Accounting Principles and is considered 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 current facility to determine whether they may incur additional debt under such facility. For a reconciliation for income before income taxes to EBITDA, please refer to the Company's recent earnings release which can be found on the Company's website under the Investors tab.

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

Good morning ladies and gentlemen. Welcome to Park-Ohio's second-quarter 2012 conference call.

Joining me this morning is Matthew Crawford, who is President and COO of the Company, and Scott Emerick, the Chief Financial Officer. We will begin with Matthew's review of the operations for the quarter and year-to-date.

Thank you and good morning everyone. Thanks for joining us today.

Our core operating performance was solid in the second quarter during which we saw most end markets meet or exceed demand expectations. Integration of our March acquisition of Fluid Routing Solutions, or FRS for short, has been smooth and is achieving expectations.

Highlights of the second quarter financial performance were highlighted by a 25% increase in revenues and earnings of $0.37 per diluted share. This result compared favorably to a $0.10 loss per diluted share in the prior year.

The 2012 results were unfavorably impacted by $13 million or $0.69 per diluted share of unusual pretax litigation settlement costs. I'll discuss these costs in more detail a little later.

EBITDA as defined totaled $18 million for the second quarter of 2012 and also included the impact of a $13 million pretax litigation settlement cost. This compares to EBITDA as defined in the second quarter of 2011 of $21 million.

Looking again at the financial results with a little more specificity, net sales for the second quarter were $308.8 million which was an increase of 25% over the prior year of $246.8 million. Acquisitions accounted for most of the increase in net sales. The remainder of the net sales increase is attributable to a strong performance in the Supply Technologies segment and the Engineered Products segment. On a sequential basis, second-quarter net sales increased 17% with substantially all of the increase attributable to acquisition activity.

Gross profit of $56 million increased $10.8 million compared to the prior year's gross profit of $45.2 million, also due largely to acquisition activity. The gross margin percentage is 18.1% in the second quarter, which is comparable to the 18.3% in the second quarter of last year. This change is largely due to changes in sales mix, including FRS.

Selling -- or SG&A expenses were $29.6 million for the quarter compared to $28.8 million for the prior year. We continue to obtain operating leverage on our SG&A expenses as these costs as a percentage of net sales declined from 11.7% in 2011 to 9.6% in 2012. Although we continue to watch our spending very carefully, we are making investments to support our ongoing controlled ascent.

In the second quarter, we settled a significant legal matter for the sum of $13 million. The case involved a dispute with a former customer over the design and installation of a melting furnace. The melting furnace was designed and built at a cost of approximately $35 million. Just prior to the completion and final acceptance, there was a failure rendering the furnace completely inoperable and unusable. We believe this was the result of misuse by the customer. The customer commenced binding arbitration proceedings and sought $37 million in damages. Before the start of the arbitration and after a complete evaluation of the evidence, coupled with the unique set of facts and circumstances, the venue of the proceedings and more importantly the uncertainty of -- the uncertain outcome, we chose to settle the dispute. While we are involved generally in routine customer and commercial disputes, we believe this dispute was unique and unprecedented both in the amount of the settlement and the facts and circumstances surrounding the claim.

Interest expense decreased by $400,000 from $6.9 million in 2011 to $6.5 million in 2012. Although average borrowings were higher in the second quarter of 2012 due to the acquisition of FRS, the lower average borrowing rate of our debt contributed to the decrease in interest expense.

Turning to taxes, income was taxed at an effective rate of 34.5% for the quarter. As a reminder, we reversed the final portion of our valuation reserves against our NOLs in the fourth quarter of last year, so we will be recognizing a more normal tax provision for book purposes in 2012. We estimate that we will utilize our remaining NOLs in the second half of 2012. Accordingly, we estimate that cash taxes will be $7.8 million for the year with $4.2 million being paid in the second half.

Now looking at the segment results but before getting into the numbers themselves, let me update you on how we have reorganized our segments. Subsequent to the acquisition of FRS in March 2012, during the second quarter and as a result of the acquisition, the Company realigned its segments in order to better align its businesses for the underlying markets and customers that the Company serves. In doing so, we combined aluminum Products, rubber products previously included in the Manufactured Products segment, Delo Screw Products, previously included in the Supply Technologies segment, along with FRS to form the Assembly Components segment. The former Manufactured Products segment will now be referred to as Engineered Products. The results of operations of FRS from the date of the acquisition through June 30 are included in the Assembly Components segment. The business segment results for the prior year have been reclassified to reflect these changes.

Now looking at the Supply Technologies segment, revenues increased 6% compared with the second quarter of 2011 to $131 million. Supply Technologies experienced strong sales increases in its truck and power sports market, and continued to show excellent penetration into the lawn and garden and electrical markets as well. Our international growth initiative to support our customers on a global basis continued successfully. New business bookings during the second quarter were approximately $10 million on an annualized basis.

Segment operating income grew 19% to $9.7 million. Segment operating income margin grew 70 basis points to 7.3%. We continue to experience good product and customer mix, and we remain committed to expense management.

There are some seasonal impacts to the segment, though, and we have noticed on an isolated basis customer concerns over near-term demand. So while we expect a solid 2012 performance, we believe the second-half performance will be challenged to meet or exceed the first-half results.

Next, I'll discuss the Engineered Products segment. Net sales increased 4% compared with the second quarter of 2011 to $86 million. The increase in net sales was driven by strong performance in the forged division, highlighted by continued strong demand in the rail industry. The Industrial Equipment Group continues to show strong and consistent topline performance, buoyed by the strong North American equipment and aftermarket demand.

Segment operating income grew 19% to $14.3 million. Segment operating income margin grew 200 basis points to 16.6%. Segment operating income set another multi-year high, breaking the highs set in the first quarter, as the segment benefited from significant operational leverage as well as efficiency improvement in our forged division as a result of recent capital investments. While we experienced an excellent first half of 2012, we believe the fundamentals are in place for continued momentum through the remainder of 2012.

Now, let's move into a discussion of the Assembly Components segment. Net sales increased 125% compared with the second quarter of 2011 to $91 million. The FRS acquisition contributed to the significant increase in net sales. Rubber products also showed substantial improvement and aluminum continues to work hard to launch significant new business.

Segment operating income grew to $7.3 million. Segment operating income margin grew to 7.9%. While the addition of FRS was the significant contributor to this increase, we are also pleased with the improvement at the rubber products group. Aluminum products remains on track for improved performance.

Specifically as it relates to FRS, we have begun execution of our integration plan and believe we can expand upon their success through both Park-Ohio synergies and FRS strategic initiatives.

Next I'd like to take a moment to discuss operating cash flows. Operating cash flows were $19.1 million for the first half, which compares to $11.6 million during 2011. Improved earnings and an improved working capital position contributed to the increase in operating cash flows. We expect to improve operating cash flow versus the first half during the balance of 2012.

Capital expenditures were $4 million for the quarter as we win significant growth opportunities, particularly in our Aluminum Products group. We anticipate our full-year capital spending to be more closely -- to more closely approximate $23 million with $16 million to be spent in the second half of the year.

I now would like to update our net sales earnings outlook for 2012. We currently forecast our consolidated 2012 net sales to be in the range of $1.165 billion to $1.175 billion. We're also updating our earnings per diluted share forecast to be in the range of $2.60 to $2.70 per diluted share. This updated earnings forecast includes the unusual $13 million pretax settlement charge in the second quarter of $0.69 per diluted share. In addition, we are forecasting EBITDA as defined to be approximately $96 million for the year-end December 31, 2012, which also included a settlement charge as an expense in deriving EBITDA as defined.

Thank you. Now back to you.

Thank you Matthew. At this time, I would like to proceed to the Q&A portion of the meeting.

(Operator Instructions). Ajay Kejriwal, FBR Capital Markets.

Good morning. Thank you. So very nice performance, underlying performance, in the quarter. And if you exclude the litigation charge, you're basically increasing your EPS guidance by about, what, $0.19, $0.20. I guess the question is what's driving that change versus your previous guide? I know first half is tracking a little bit better, but any color by business would be helpful.

It's Matt. How are you? I begin by saying that we try particularly early in the year to be a little bit more conservative. So as we continue to execute our plan, to the extent we are successful, there is some opportunity there that's inherent. But I would also say that we have seen, as I mentioned in my comments, almost every end market being pretty strong. Have we been surprised per se? No. But certainly the acquisition of FRS has exceeded -- I would say it's met our expectations and it's on plan. We've built a little conservatism in there.

Clearly, our Manufactured Products group and the underlying forge and equipment businesses have seen very robust aftermarket activity, which is a high margin for us. So certainly Supply Technologies has seen across the board pretty strong demand in the first quarter. So I wouldn't say it's a new theme. I would say that we have seen mostly positive news incrementally compared to plan in almost every part of the business.

And I think that with limited other than of course the settlement cost with the limited negative surprises. So it's really a broad-based story as opposed to a surprise in any single business.

The only one -- the aluminum business that we've been long awaiting is really beginning to launch, so I think that's helped us. Quite frankly, we're just a little bit ahead of that curve. But all these orders we have written and continue to write are helping a little bit. But again, this is a very balanced performance by all the units. This is not one outstanding reason for that. It's just a lot of hard work and our customer base, as you know, is very diversified. But there are a lot of touch points, so it seems to be working very well and our diversification is really helping us continue to grow at what we consider again a pace that is acceptable.

Thank you. And then Ed, on that aluminum business, it sounds like you are a little bit ahead. Maybe if you can remind us on what the revenue expectations are as these platforms ramp into next year.

We, again, don't give specific information. We are, as indicated in the last conference call and we have been signaling now for close to a year, that we've written over $90 million worth of new business that would be coming at us in the middle, or the late part, the latter part of this year which we think the third and fourth quarter. And quite frankly, we've been fortunate enough to write another additional new block of businesses. It's close to $10 million. So it's pretty much on schedule, but it's been a long time waiting for the aluminum business to really gain the momentum that we expected. But we are up and shipping. All the orders are beginning to flow through the P&L as we speak. And this will be particularly active, hopefully in very, very strong way for the next four or five years.

Good. And one more from me and I'll pass it along. On Supply Tech, you had a very nice margin quarter, but revenues declined a little bit sequentially. And typically second quarter has been an improvement for you. So is that just foreign exchange, or is there something else going on? I know Matthew said something about second half being a little bit challenging. Any more color there would be helpful. Thank you.

I was looking at the Supply Technologies revenue. This is Scott Emerick, recently joined Park-Ohio as their CFO. Really I would describe the first and second quarters as pretty good comparable. It was within about $1.2 million in total revenues, so very consistent performance really overall in that segment. And it's strength is in the first half of the year. So Matt referenced, due to some seasonality issues, you will see some drop-off in revenues in Supply Tech in the second half, yet just very strong operating profit performance still for that segment.

I would also comment that while your comment is traditionally true, this is an average daily sales business. So really depending on how average daily sales fall in any given period. Clearly most often second quarter has the most, but we haven't looked specifically at the shakeout. I would echo Scott's comments. I view the first and second quarter from a business activity and demand as very comparable.

Got it. Thank you very much.

[John Baum], private investor.

Welcome to Scott. Welcome aboard.

Always nice to hear from you.

Always nice to hear from you too. Let's see, a couple of cats and dogs here. I don't want to throw salt in the wound here, but on the litigation costs, did you collect any cash when you were building that, or is this like a complete cash loss? Was there any salvage value? Just trying to get a little color on what the overall burden was for that.

This is Matt. No, we collected -- I mentioned in my comments that the order was for $35 million. We collected substantially all of that a couple of years ago. So, I think all but a couple million bucks of it, so about $33 million. So no, we are paying them back essentially out of what they had already paid us. There is some salvage value, probably not material to the overall settlement cost or cost -- or value of the contract. But -- and the equipment is in a remote location. So I would temper any expectations you have on salvage value.

Just a little more color on it, we actually -- this contract was written with a company in South Africa. And it called for binding arbitration in South Africa in case there was an issue. Keep in mind this is pretty much standard equipment, so we were quite surprised that this jumped out at us. But most important aspect of this thing, the company was sold while we were in the process of moving the equipment in there to a Russian steel company. So that complicated a lot of the issues here relative to the urgency and the importance of getting this behind us. So it's -- it got very complicated and, quite frankly, I'm very pleased with our ability to settle this and go on. And actually we ended up with a good relationship with the company, so it's not a lot of sour grapes.

Excellent. Let's see here. Moving on to more pleasant things here, on the aluminum products, Eddie, I know this is your baby. Is the 2013 aluminum products auto launch still going as per plan, a little slower? What do you see looking out next year and another year after that with this segment?

The launch is on its way. We think we are, as a company, as stakeholders, it's been a painful, slow development. We are clearly in the right place at the right time. There is a reduction in the number of suppliers and there is a tremendous interest and need for all these companies to increase their aluminum content into vehicles to reduce weight. If you talk about it full time, [Fiat] price may be just a little bit ahead, it's their intention here, but the cars are going to be lighter. It's going to call -- calls for more aluminum. And quite frankly, I think I can see in the future where we have to be a little bit careful right now writing additional orders at certain plants. A couple of our plants are completely filled, so we are now down to asking and looking for business that fits the plants that are underutilized. So we are right where we should be, and we continue to write orders, so we think '13, '14, '15 could be great years. And again, we aim everything at 11 million, 12 million cars. We don't aim it at 17 million anymore. So we are pleased with our position now, and I think you can continue to see that division improve.

Excellent. A couple of housekeeping. Second-half (technical difficulty) second-half CapEx. Is that -- I see that's going to be higher. Is this like film for new business, or it seems higher than maintenance. Are you ramping up in a couple of segments with CapEx there?

Well, the large amount of CapEx or what -- increasing the CapEx is we've decided, as you know, for many years, we have been basically an aluminum casting company and did not move to the what I'd call into the machining aspects of it. And the lesson with that one company, Metaldyne, where they were the machiner and they were the prime to our customer, we have decided to go around that, so we are adding machining capabilities in certain of our plants, so we will be able to at this point be the prime and do the machining in-house, which, quite frankly, will increase the profitability of the business. And that requires standard CNC turning material. We've been in the machining business for a long time, but we've taken two platforms out-sized that we are installing equipment, so it will be done all in-house, totally integrated, and we are not shipping into some of the machine and then shipping in the customer. So it eliminates the freight. It's more efficient. It's basically the concept as we've talked about taking ingot and turning it completely into a finished product and ship it to the customer. So that's where largely all the CapEx is in, expanding into the machining business rather than going outside. And quite frankly, combination of freight than the fact that we can do it inside very effectively at a lower cost than we would on growth outside machining. So we like it, and this is standard equipment. It's not that complicated. It's got long lives, so it's not a unique piece of capital investment. It's a standard CNC machining center which have applications for a very, very long time.

Thanks guys. It's a nice quarter. Looking forward to good stuff coming up. Again, thanks. Thanks for all your hard work.

John, thank you very much for your support.

(Operator Instructions). Jay Harris, Goldsmith and Harris.

Good morning gentlemen. I wonder if you could give us some profile of what you expect to happen in capital spending beyond this year. What do you consider -- is this just a surge that we are seeing to add machining capability to aluminum? If so, what would a more normalized level of capital spending be for the Company? When do we get there?

It's Matt Crawford. How are you? I would -- it has been traditional to see that maintenance CapEx, when we really tighten the reins on the business and invest it only in maintenance and what I would consider very high return projects, has been in the high single digits, call it $10 million.

Given the -- one of the reasons for that, Jay, is the supply technology business, and the Industrial Equipment group, which is the larger portion of Manufactured Products, those are not very capital intensive businesses. And those are a very significant percentage of our overall revenue. So it shouldn't be surprising that that number is achievable, even with some growth or efficiency capital. Given the investment we are making, as was just discussed in the machining part and the expansion of our capabilities at General Aluminum, it's reasonable to believe that our maintenance and high return CapEx numbers, our disciplined CapEx numbers, has probably reached now into the young teens. So, while we don't have an official estimate for that, I would be willing to say that a more closely monitored, non-aggressive expansionary CapEx number would be call it $13 million.

Thank you. What -- as we watch the stock price over the last period of time, it seems to be very, very sensitive to fears of recession, the economy turning down. Could you give us some color as to any areas that you're serving which have weakened over the last six months? Have you booked any new customers for supply? And just add some general color to that issue.

This is Matt again. I did mention in my comments that we had, on an annualized rate, new bookings in Supply Technologies during the second quarter of in excess of $10 million. So, we do have new account activity there and have some success.

Looking more broadly at our business performance and what we are seeing in the second half, I think we are seeing pretty stable demand among most end markets. Having said that, I do feel as though there are -- I think I mentioned as well in my comments, discrete and isolated incidences where certain businesses appear to be softening a little bit. Now, is that because of fundamental weakness? Maybe, maybe not.

I think what we are really seeing is a more traditional shutdown season in August, particularly in some of the heavy industrial markets. Automotive and Class 8 truck would be great examples of that. So particularly in the Supply Technologies segment, which is an average daily sales business, is a production plant daily sales business., is likely to see less ship days in the second half. So I would characterize it, at the high level, things are being relatively stable but there are discrete examples of some softening that may be more about seasonality than fundamentals, but certainly that is something that we need to watch carefully.

Very good answer. Thank you.

There are no further questions at this time. I would like to turn the call back over to Mr. Crawford.

I would like to thank all the stakeholders in the Company for helping us achieve the results for the second quarter, and we look forward to speaking with you again at the end of the third quarter and best of luck. Thank you very much.

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