Park Ohio Holdings Corp (PKOH) 2013 Q1 法說會逐字稿

Good morning and welcome to the Park-Ohio first-quarter 2013 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 being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed.

Good morning, ladies and gentlemen. Welcome to the first-quarter conference call for Park-Ohio 2013. I would like to turn over the microphone to Scott Emerick, our Chief Financial Officer, who will cover the necessary comments relative to projections and the reasons and so forth and so on.

Thank you, Ed. Good morning, everyone, and thank you for joining us today. If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at PKOAH.com.

I want to remind everybody that certain statements we make on today's call, both during opening remarks and during the question-and-answer, session may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.

A list of relevant risks and uncertainties may be found in the earnings press release, as well as in the Company's 2012 10-K, filed with the SEC on March 15, 2013. 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. For a reconciliation of net income to EBITDA, please refer to the Company's recent earnings release. At this time, I will turn the call back over to Ed.

Yes. I would like to introduce Matt Crawford, the President and COO of the Company, for his comments on the first-quarter results.

Thank you and good morning. We appreciate you joining us today. Overall, our results came in about as we were expecting for the first quarter. Our March forecast recognized a lack of any significant catalysts in our current economic environment, and as a result, we knew that we would start a little more slowly in the first quarter, and, as I will discuss later, to pick up steam during the rest of the year.

Highlights of the first-quarter financial performance included an 8% increase over the prior year, with revenues of $285 million and earnings of $0.85 per diluted share, which was an increase of 15% over 2012.

EBITDA, as defined, totaled $28.6 million, which was an 18% increase over EBITDA in the first quarter of 2012. On a sequential basis, comparing to our fourth quarter of 2012, the first-quarter revenues increased 3% and our earnings per diluted share increased 35%.

The 8% increase in net sales to $285 million is primarily attributable to the inclusion of a full quarter of FRS results in 2013, while the prior-year results included only about a week of FRS performance. In addition, the impact of our new program ramp-ups in our Aluminum business within the Assembly Components segment also contributed to the increase in net sales. These increases were partially offset by decreases in the net sales in the Supply Technologies segment and the Engineered Products segment, which were anticipated in the current environment.

The gross profit margin was 18.2% in the first quarter, which is comparable to the 18.6% gross profit margin in the first quarter of last year. This change is largely due to volatility in the segment sales mix between the two periods.

SG&A expenses as a percentage of net sales of 10.3% in 2013 compares favorably to 10.9% during 2012. We continue to watch our spending very carefully before making investments to support our growth plan, particularly in the Aluminum Casting business and Supply Technologies international expansion.

Looking at taxes, our effective tax rate for the first quarter of 2013 was 35.8%. As a reminder, we fully utilized our US NOLs during 2012. Consequently, our cash taxes were $4.7 million in the first quarter.

Now looking at the segments, first, let's review the Supply Technologies segment performance. Supply Technologies segment revenues, which represent about 40% of the consolidated revenues of the first quarter of 2013. Revenues decreased 14% to $114 million compared to the first quarter of 2012. While we did continue to see revenue growth in a minority of end markets, we saw most of our other markets experience demand softness related to a weaker economic environment. Notably, we saw the Class A truck market demand decline 32% compared to the prior-year quarter. In addition, as we communicated on our last call, we selectively exited two customer accounts during 2012 which did not meet our return on invested capital expectations.

On a positive note, volumes in the new year have strengthened and on a sequential basis with the fourth quarter of 2012, revenues increased 5%. Even though the truck market demand is down 11% sequentially, we benefited in the lawn and garden, HVAC, industrial and semiconductor markets. We continue to focus on our international growth initiative, diversify and expand our customer base and add growth resources to our sales and marketing team.

With those goals in mind, our backlog of quoting activity is still in excess of $100 million of annual business. We are happy to report that we have just won approximately $6 million of new annualized business that should commence realization in the fourth quarter of 2013.

Segment operating income declined 11% to $8.8 million. Despite the unfavorable revenues trending, as discussed above, segment operating income margin grew 20 basis points to 7.7% compared to the prior year. We continue to realize good product and customer mix, including the introduction of new items into our supply chain offering, the paring of some low-margin business, and we remain committed to strong expense management.

Next, I will discuss the Engineered Products segment. Engineered Products revenues represented 28% of consolidated revenues. Net sales decreased 8% to $79 million compared to the first quarter of 2012. Our forging business demand, which is primarily focused on rail, was very strong in the quarter. However, the industrial equipment business demand for original equipment continued to reflect the weakness discussed on our year-end call, especially in international markets. Still, our expectation for the second half of the year remains strong for the industrial equipment business based on current bookings, inquiry levels, as well as a steady aftermarket performance.

Segment operating income decreased 13% to $12.3 million, while segment operating margin was still very strong at 15.6%. Lower absorption based on volume and some unfavorable customer and project mix contributed to a 100 basis point reduction in segment operating margin compared to the first quarter of 2012.

As we look forward, we are watching booking trends carefully in order to respond to an expected improvement, but also recognize that key international end markets are restrained and spending must be managed carefully.

Now let's move into a discussion of the Assembly Components segment. Assembly Components revenues represented 32% of consolidated revenues. Net sales increased 107% to $92 million compared to the first quarter of 2012. Incremental revenue from the FRS acquisition is the primary contributor to the significant increase in net sales. Remember again that we acquired FRS on March 23, 2012, so just over a week's worth of operations is included in last year's results. However, each key product line within the segment contributed increased revenues in the quarter.

On the strength of the new program launches secured in the Aluminum business, revenue in the Aluminum business increased 11% as compared to the prior year. While we are excited to see these improved Aluminum results, the customer program launches are still gaining momentum. We expect to see a more significant step change in revenue levels during the second half of 2013.

Segment operating income grew to $6.8 million and segment operating income margin grew 7.4%. The addition of FRS was a significant contributor to this increase in operating income. We expect the quality of earnings will continue to improve as the Aluminum business hits its stride in terms of utilization and plant productivity.

Next, I would like to take a moment to discuss cash flows. Operating cash flows are very strong and totaled $16.4 million for the first quarter of 2013. Net capital expenditures were $4.1 million for 2013. As a reminder, I refer to net capital expenditures because we entered into some low-interest-rate sale leaseback transactions to finance some of our capital expenditures in 2012 and 2013.

We are still forecasting capital spending for 2013 to total $25 million, with $14 million of this amount representing growth capital for machining equipment for the new program launches in the Aluminum business of the Assembly Components segment.

We expect depreciation and amortization to approximate $21 million, and we believe that our effective tax rate will be approximately 36%.

In short, we are pleased with the first-quarter results, particularly given some of the ongoing softness in a few key end markets or geographies. We believe this sets us up nicely for the rest of the year. Accordingly, we reaffirm our forecast on our earnings per diluted share to be in the range of $3.65 to $3.95. In addition, we are reaffirming our forecast for EBITDA, as defined, to be within the range of $119 million to $124 million.

Let me close by mentioning how excited we are with the Bates acquisition that was announced earlier this week. As you will recall, we discussed our exciting growth strategy during our March call, which focused on our excellent organic growth opportunities and high-value bolt-on acquisitions. We acquired Bates for approximately $20 million and it is clearly the type of high-value bolt-on acquisition that we look for, which in this case will nicely augment FRS's products and capabilities. Annual revenues in 2012 were approximately $42 million, and we expect it to be modestly accretive during 2013. We welcome the Bates team to the Park-Ohio family.

Thank you. Now I will turn it back to Ed.

Thanks, Matt. Just a follow-up on a couple of Matt's comments relative to the Bates acquisition. This is exactly what we had in mind when we recently announced our [In-5] strategy for 2017 increased revenues. Not only was this, as described by Matt, a bolt-on, meaning that the company fits directly into one of our current three business silos, but more important, I think of it as an excellent transaction. It appears to be, from my viewpoint, a five-star kind of look-alike company.

Let me describe those terms. Number one, these are all -- this particular acquisition adds a lot of new customers to our Company, and that is very important. And these customers are potential targets for other products and services from Park-Ohio. That is part of an evaluation of a transaction. Not only are there new major customers, they manufacture products that we are currently not manufacturing. That gives us other items to carry over.

So when you are thinking of these acquisitions, and we were thinking about what we were trying to accomplish by 2017, an acquisition has to have some real high points of interest for us, and more than one. So not only do we have great customers; now it is the products we can cross-sell. Then it is a great location. We like rural plants. We like them in an area where [we're] dominant employee.

And what is really particularly interesting about this particular acquisition at Bates, it is 30 minutes from one of our most successful operations we have in that particular silo. So it is in the same neighborhood, great management; the individual that has running it has been there for 28 years. Everyone knows everyone. So there is a lot of synergies that can be garnered out of having operations of similar business not far from each other from the standpoint of the potential increase in -- which is another important part of it. It is good management, but this company has opportunities to grow. It has opportunities to add EPS to our Company going forward.

So high-level acquisition. It represents what we are looking at and what we are trying to accomplish as we move towards our 2017 goals. I'd now open the lines for questions.

(Operator Instructions) Ajay Kejriwal, FBR Capital Markets.

Thank you. Good morning. So Bates seems like a very nice bolt-on acquisition. Maybe a couple of questions there. First, maybe talk about synergy opportunities, both on cost and the revenue side. And then maybe if you can provide any color on valuation.

The obvious deficiencies of having two plants within 30 miles of each other, the management efficiencies, we believe that there is definitely things to be accomplished that we can, over a very short period of time, increase the historical EBITDA. So it is there in people, it is there in efficiencies, and the plant, I would say, is -- the one we acquired is a little old-fashioned by our standards relative to employee productivity. But clearly, they will get there in very short order.

So it is pretty simple. This is blocking and tackling. Again, that is why we call them bolt-ons, that is why we call them look-a likes; because they are simple, straightforward businesses that we understand. We understand the customers, we understand the employees, we like the concept of being in the rural areas. And this is where we have done best historically. So we are going to say on that point.

Ajay, it is Matt. I would only add to that that both of these companies are basic in rubber. So there is an expectation that as we grow bigger in extruding and molding rubber that there could potentially be some synergies in that area as well. So while there are different products and different customers, which we view as cross-selling opportunities, the capabilities in the manufacturing facilities and the core raw material are the same.

Got it. So it sounds like you think at some point there would be revenue synergies?

Absolutely.

Good. Is the valuation similar to what you have been paying for deals in the past?

Yes, I think it's -- we are locked into a certain level, as you know. And we enter a transaction with a number we feel is very, very solid, and we look at that particular number. And the decision is really anchored in how we can improve the Company through technology, through employee productivity.

So this is pretty straightforward stuff. And the gentleman who runs the one plant that is down there is one of our best plant managers in the country. So it is in the hands of the right individual. So, yes, I think it's --. And I don't like this low-hanging fruit concept, but there is a lot of low-hanging fruit there, relatively speaking.

I am not implying that there was -- they were not efficient down there. But there hadn't been a lot of money spent on it. It was privately held and it had -- a lot of capital hadn't been spent on it to do the simple things that really increase the productivity per employee.

Good. And then maybe on the Aluminum business, is there an update on the ramp on the new programs? How did they do in the quarter and what is the expectation for the second half?

It is still a developing story. One of the platforms that we are on is a little behind from the revenue standpoint at the lots around the world, around the country. But that seems to be catching up.

But we're really -- as indicated, we are very, very close to breaking through in size here. But it's again -- bringing up this many -- when you bring up $100 million in business and $70 million of it is casting and $30 million is machining, which is a new product for you, a new, diversified product that will add a lot more profitability to that particular unit, it is a lot happening.

So we are doing well and I am not frustrated with it, but it is on its way. But it has been on its way for a year and a half, so I think I can wait another 90 days. I hope you can.

Of course, of course. It is a nice opportunity there. Then maybe last one for me before I pass it on. So Engineered Products, I thought there was a comment about expected improvement in orders. Maybe provide a little bit more color around what you are seeing there. And then on the order activity, what is the expectation? Is sounds like you expect things to pick up.

It is Matt. I would echo some of the comments that were made just recently on the March call. We have been seeing ongoing restrained equipment orders, particularly large equipment orders, whether it be in the primary steel end market or whether it be international activity. Our performance in that segment has been buoyed by a pretty steady aftermarket and a reasonably strong US manufacturing market. So we continue to struggle with that a little bit.

Having said that, we do feel that the order activity and -- the recent order activity and the inquiry levels would support an ongoing rebound of a modest amount, particularly in the induction heating side of the business.

Got it. Thank you.

Thank you very much, Ajay.

Steve Barger, KeyBank Capital Markets.

Good morning, guys. Most of the industrial companies we cover have missed on revenues this quarter. And just thinking about that in the context of Supply Technologies, can you tell us how much of the revenue decline was related to lower customer demand and how much was maybe due to the customer relationship you exited?

Steve, it is Matt. I wouldn't want to be specific in terms of percentages, other than to say that the majority of it was softness with our current customer base. Although the customers that we kicked out were a significant portion as well. But I would dwell less on that, because that has a positive impact on our margins, and say that the majority of it was softness, obviously, Class A truck being the majority. But not the least of which as well is we do have some government and defense exposure in that business and that struggled as well. So they were both significant in the quarterly numbers, but I wouldn't underestimate the impact of some slower key markets.

Right. So I think you alluded to this, but how would you characterize 2Q so far in terms of pullthrough for Supply Tech. Was April up sequentially from March? Do you see a general firming trend or is it still kind of restrained?

I could comment that, as I have indicated in my comments, we expect the business to strengthen throughout the year. When I say the business, I mean Park-Ohio. I think Supply Technologies is no exception to that trend.

Okay. In terms of Supply Tech, is there any seasonal or structural reason why the level of margin that you saw this quarter isn't achievable for 2Q or for the year?

I don't know that we view the business as significant in any real material, to be honest with you, Steve. I mean, obviously, we do have a lawn and garden segment that is going to be better in certain times of the year. We have certain segments that are cyclical, but we have never thought of it as being materially cyclical in any fashion.

Right. No, I understand. So the margin level that we are seeing now probably is how we should be thinking about it as the business progresses through the year.

I think the first quarter represented pretty good margins and good restraint on spending. So 7.7, I think, in terms of margin was, on a relative basis, pretty good. But once again, I think that was a function of paring some business and some good mix.

I mean, truck, for example, while it is extreme -- not extremely -- it is a solid return on investment business, it is a lower margin business. So the mix between kicking out some low-margin customers or no-margin customers and truck following off had the perverse effect of actually helping our operating margins.

I see.

Let me answer that question a little differently. I think the first-quarter results here is a clear example how Park-Ohio's diversified business strategy works. We have lots of touch points, as we discussed, we are in a lot of industries. We have a relationship with world-class manufacturing companies.

And it is not going to be -- the orchestra is not going to be perfect within Supply Technologies. But the results will speak for themselves. And of course truck is down, and we miss it. We wish it was there. But again, we miss a couple other things. But we could spend all day talking about what the difference is. We are talking about a Company that has, again, a lot of touch points, a lot of industries, great customers. Some are going to be up and some are going to be down.

And just as soon as we start thinking about the truck business, we know there is a little bit of a cycle here, and it will come back very, very strong, because they will sell all the trucks off their lots. So we just have to be patient, wait around and hope the rest of the diversified portfolio hangs in there and continues to increase the revenues that increase the sales and increase the profits.

I got you. No, I am just saying it was a great margin. I would love to see that level throughout the remainder of the year.

Shifting to Assembly, expectation, I think, is that the segment will show pretty significant top-line growth this year, given what you did with FRS last year and as the Aluminum business fills up. Can you help frame up how we should think about growth in that segment before the Bates contribution? Are you thinking high-single, low-double kind of top-line growth rate?

Steve, I would only tell you that -- and I can't comment specific on that because we don't forecast individual segments. But I will say -- and I think we mentioned on our calls -- that FRS did anticipate a low related to the missed opportunities under prior ownership in one of their key businesses. So I don't know -- I think the principal contributor to growth over the next year is going to be Aluminum, offset maybe by flat opportunity at FRS.

Got you. Thanks. And just prorating the $45 million number that you put in the press release for Bates over eight months suggests that maybe they will contribute around $30 million this year. Is that business accretive to the 7.4% operating margin that you put up in 1Q?

You know, really, it is so recent that one of the reasons that we've chosen not to forecast how Bates is going to impact our 2014 forecast is it is relatively new. We are getting our arms around it. We feel comfortable it is going to be accretive. But to forecast margins quarter by quarter or impact would be too challenging at this point.

All right. One more, and I will get back in line, and it is a related question to what you just said. But I know it is early in the year, there is plenty of end market concerns. But was the Bates accretion assumed in the original guidance, or are you just giving yourself a little room around figuring all of that out by holding guidance constant, even though you think it should be modestly accretive?

Steve, I wouldn't think of it as much that way as I'd think about the fact that, as you just framed the issue yourself, you are talking about $30 million on $1 billion left or so in revenue. So I think that is perhaps -- we have a window on our EPS guidance of $0.30. Any way you slice it, any assumptions you make, the Bates performance is important, but not really material to our guidance at this point.

Fair enough. Thanks.

(Operator Instructions) Jay Harris, Goldsmith & Harris.

Good morning, gentlemen. I had the impression from prior conference calls that your capital spending plans this year would be lower than what you have just stated as $25 million. If that is right, where is the incremental money going, what kind of projects?

Jay, I will kick it off and then I think my dad can clean it up. We have, I think, been very transparent that -- over the last four calls that as we have continued to see more opportunity in the Aluminum segment, we have tried to seize those opportunities appropriately. So while I do recall a call -- I'm guessing now -- three calls ago, four calls ago -- that discussed in 2013 getting back to more reasonable levels or more historic levels, I think that we have been transparent in that -- as we continue to see opportunity, we are seizing it.

So the answer to your question is it is a moving target as we see more opportunity and the lion's share of that money is going into the Aluminum business (multiple speakers).

Go ahead. I'm sorry. Were you going to add?

I was going to add. This is Ed Crawford. I think we have discussed this. You have -- in the Aluminum business, historically the industry's function, there was a casting company, which we were. And it was -- the OEMs would (inaudible) go to a particular machining company, which we did. And then it would go to a company that did the assembly for the company or the buyer, the ultimate auto buyer.

When we took on this $100 million business, I have indicated numerous times that 70% of that was investing in the casting business in our five plants. The change is we have moved and we are the only one in the industry, in all five plants, in which we cast the product, we machine the product new, we machine the product and we do the assembly. And this has been a very important change.

It has been well-received by the buyers. Because inefficiencies of moving freight around, from making the casting, shipping it to someone to do the machining, shipping to somebody to do the assembly, they were paying for that; they fully understand that now. And that is maybe why we have been able to write -- and been so successful and will be successful in writing more business in Aluminum Component business.

It is clearly -- we are able to do it all within one building. We can capture the scrap from the casting business and reprocess it. So any change in the original profile of where we were going and the CapEx around Aluminum changed when the decision was made to go into the machining business, which has a higher return on investment than the casting. Now does that explain the --?

Yes, very well. Is there a possibility that as we move into 2014 that you will see even more opportunities in the aluminum area?

I have never seen the robust nature of the aluminum business as far as components are concerned. The big platforms that people that would consider -- Ford would consider the F-150 a big platform. Chrysler would consider the minivan a big platform. Up to this point, they have been doing that product with -- in iron. There is high likelihood it won't go to aluminum. And quite frankly, at this particular juncture, I don't plan to add any more CapEx to the current platform we have because the current platform that we have is indicated as the potential to do close to $250 million.

So we have five plants that are virtually all sold out. So any new investment in this would be if we intend to participate in the next round of dramatically increased amount of aluminum in the cars. This is something that we are thinking about virtually every day. But the aluminum content is going up on all the major platforms to reduce weight. And quite frankly, I think there is a shortage in embedded casting and machining in North America as we speak, and someone is going to have to step up to meet that demand. And we will look at it at that particular time.

But right now, our strategy is to take the five plants, reach the goals we have talked about, and that is what is in our mind at this point. But it is important to realize that we had to be in the machining business to be able to recapture the scrap, to recycle it within the building, and our customers look at this initiative as reducing their cost without taking any margin from us. That is an important thing.

So we think we are going to increase our margins, EBITDA, on the sales because of the machining, and we have saved the customer a lot of money by eliminating all the freight. So we are pretty happy where we are. It has been slow in coming, the ramp-up, but the results are starting to speak and will get louder as we go through the year.

That is an excellent answer. On a timeframe, when is the next round of ramp in aluminum use in automobiles likely to be designed in? What are we talking about?

2016.

Okay. Thank you.

And the bidding process starts really end of this year, first part of next year.

Thank you.

Okay. Thank you very much, Jay.

At this time, there are no questions. I will turn it back over to the presenters for closing remarks.

We want to thank everyone, all the stakeholders in the Company. Again, as we indicated, we think we are off to a good start. This is clearly a time and probably, hopefully, forever where the Company again is diversified enough, has enough touch points, has enough customers, world-class customers, around the world. And everything won't perfect every quarter. There will be some up and some down. But generally speaking, the Company is in a position to reach its goal for 2017. Nothing happened in the first quarter to indicate that we are not going to be able to accomplish that.

So we are on the pace in the first quarter to reach that goal, so let's just stay there and keep moving. And I think we are in the right place at the right time, and we thank you and everyone for their support. Have a nice day.

Thank you ladies and gentlemen. That does conclude today's Park-Ohio first-quarter 2013 results conference call. You may now disconnect.