Park Ohio Holdings Corp (PKOH) 2013 Q2 法說會逐字稿

Good morning. Welcome to the ParkOhio second 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 also 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, Mr. Crawford.

Good morning ladies and gentlemen. Welcome to ParkOhio's second quarter 2013 operating results conference. I would like at this time to turn over the call to the President and COO of the Company, Matt Crawford.

Prior to doing that, let's have Scott cover some of the Safe Harbor stuff.

Thanks Matt. 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 www.PKOH.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 of certainties 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 Matt.

Thanks Scott. Good morning everyone. Thanks for joining us today. Overall results came in just a little better than we were forecasting for the second quarter, and consistent with our long-term performance expectations through normal business cycles. As we mentioned in May, our internal forecast did not recognize any favorable catalysts in our current economic environment, and as a result we knew that we would start slow in the first half of 2013. While some of the improvements in the economic climate have been slow to materialize, we are still expecting a better second half to 2013 compared to the first. While revenues and earnings improved year-over-year, we were especially happy to see sequential improvement in the second quarter after a very sluggish first quarter.

Now let's look at the second quarter 2013 performance compared to the prior year. Net sales increased slightly in the second quarter to $309.4 million compared to $308.8 million on the prior year. On a sequential basis revenues increased 9% compared to the first quarter. While revenues are relatively flat year-over-year due to current economic sluggishness in some of our end markets, the increase on a sequential basis is primarily attributable to volume increases in the supply technology segment and assembly component segment. The gross profit margin percentage was 18.8%, which is a 70 basis point improvement compared to the 18.1% gross profit margin in the second quarter of last year. This improvement is largely due to a change in the sales mix between the two periods.

Consolidated SG&A expense increased 13% from $29.5 million in 2012 to $33.3 million in 2013. SG&A expenses as a percent of net sales were 10.8% compared to 9.6% in 2012. The increase in SG&A expenses is primarily attributable to the timing of certain self-insured employee medical expenses, increases in incentive comp expense, and shared base compensation expense. While we have continued to invest in some growth resources, we continue to manage our discretionary spending very closely.

Operating income was $24.8 million which was 8% of net sales. And exceeded our prior operating income of $13.4 million by 85%. As a reminder, in the second quarter of 2012 we settled a significant legal matter that was unique and unprecedented, both in terms of the amount of the settlement and the facts and circumstances surrounding the claim for a sum of $13 million. Since our interest expense of $6.6 million was comparable between the two periods, let's look at taxes. Our effective tax rate for the second quarter of 2013 was 34.1%, this was comparable to the prior year effective tax rate of 35.3%.

Net income totaled $12 million and exceeded prior net income of $4.4 million by 173%. Diluted earnings per common share were $0.98, which exceeded the prior year results of $0.37 by 165%. Again, the 2012 results were impacted by the settlement charge. On a sequential basis diluted earnings per share were 15% greater than the $0.85 per diluted share reported in the first quarter.

Now let's look at the segment results. First, on supply technology performance. Supply technology revenues represent approximately 40% of the consolidated revenues during the second quarter. Revenues decreased 6% to $124 million compared to 2012. While we did see revenue growth in the agricultural and construction markets which was up 8%, we saw most of our other markets experience demand softness related to weaker economic demand fundamentals year-over-year. Notably, while truck showed sequential improvement over the first quarter, we saw the truck market demand decline 10% compared to the prior year.

In addition, as we communicated in previous calls, we selectively exited a customer account in 2012 which did not meet our return expectations. This pairing of low margin business represented about a $2 million reduction of revenue. On a positive note, volumes in the second quarter have strengthened compared to the first quarter. On a sequential basis with the first quarter of 2013 revenues increased 9%. In particular the truck market and recreational markets were up 38% and 9% sequentially.

We continue to explore opportunities to grow internationally with existing and new customer opportunities. Furthermore, our backlog of quoting activity is still in excess of $100 million of annual business. Notably we are also increasing quotation activity in Europe and Asia, with industrial customers which supports our selling strategy of leveraging existing multinational relationships globally.

Segment operating income declined 6% to $9.1 million. Despite the unfavorable revenue trendings discussed above, we maintained an operating income margin of 7.4% which is consistent with 2012. We continue to realize good product and customer mix, including the introduction of new items into our supply chain offering, and pairing of some low margin business. And we as always remain committed to strong expense management. Next I will discuss the assembly components segment.

The assembly components revenue represented 34% of consolidated revenues. Net sales increased 16% to $106 million compared to the second quarter of 2012. Supported by another solid performance in our fluid routing and rubber and plastics group. The remainder of the increase is primarily attributable to the organic growth in the aluminum business. On the strength of the new program launches secured in the aluminum business, aluminum revenues increased 24% compared to the prior year.

While we are excited to see these improved aluminum volumes, the customer program launches are still gaining momentum. We expect to see a more significant step change in revenue levels in the third quarter as additional programs launch production. Segment operating income grew to $10.8 million, which was a 50% improvement over the prior year, and segment operating income margin grew to 10.2%. Each product line in this segment delivered improved earnings performance year-over-year.

Now let's move into a discussion of the engineered product segment. Engineered products revenue represented 26% of consolidated revenues. Net sales decreased 7% to $80 million compared to the second quarter of 2012. Our forging business demand, which is primarily focused on rail and aerospace continued to be very strong in the quarter, and revenues approximated those of the prior year. However, the industrial equipment business demand for original equipment continued to reflect the weakness discussed in prior calls, especially in the international markets. Still we continue to expect a stronger second half of the year for the industrial equipment business based on current booking levels, inquiry levels, as well as a steady aftermarket performance.

Segment operating income decreased 27% to $10.4 million, while segment operating margin was still relatively strong at 13% unfavorable customer and project mix coupled with the impact of fixed costs spread over a lower base of volume in the industrial equipment business contributed to the reduction in segment operating income compared to 2012. As we look forward we will continue to watch booking trends carefully in order to meet our commitments to the expected improvements or adjust for unexpected weakness.

Next I want to take a moment to highlight cash flows. Operating cash flows were very strong and totaled $17.4 million for the second quarter. Year-to-date operating cash flows were $33.8 million, an increase of 77% year-over-year. Net capital expenditures were $12.9 million for the first half of 2013, the majority of our capital expenditures are ear marked for growth.

We are still forecasting net capital spending to a total of $25 million, with $14 million of this amount representing growth capital for the aluminum machining equipment for the new program launches in the business. We expect depreciation and amortization to be approximately $21 million, and we now believe our effective tax rate will be approximately 34.9% for 2013. Overall, we are pleased with our second quarter performance given the uneven nature of some of our end markets. While some of the economic uncertainty is carrying over into the start of the third quarter, we remain optimistic we will see demand improvements in the second half of the year, especially in the aluminum business and the industrial equipment business.

We are now forecasting total consolidated revenues to increase almost 9% for the full year. After considering our updated mix of business based on these expected revenue levels, we reaffirm our forecast and earnings per diluted share guidance in the range of $3.65 to $3.95. And additionally we reaffirm our forecast for EBITDA as defined to be in the range of $119 million to $124 million. Before we move on to Q&A I want to highlight one more transformational change that we are forecasting as a result of our excellent growth in the last couple of years, and which will serve as a springboard as we continue our growth path.

Not long ago between 2008 and 2010 our gross debt leverage hovered in the fours and fives. As we have grown the business, and its earnings power, both organically and through strategic acquisitions, we simultaneously have significantly reduced our leverage position. At the end of 2012 our gross and net leverage have fallen to 3.8 and 3.35 respectively. And we are forecasting leverage at the end of 2013 to be 3.15 and 2.7 respectively. We are very proud of this achievement. Thank you, and now I will turn the call over to our Chairman and CEO.

Thank you very much, Matt. I would like to turn over the conference to the attendees online with questions. Operator are you there?

Sorry, yes. (Operator Instructions). Your first question comes from the line Ajay Kejriwal. One moment here. Sir, your line is open.

Thank you. Good morning.

Good morning, Ajay, how are you today?

Good, good. For a minute I thought I lost you.

No, you found us once, you are never going to lose us, I will assure you of that.

That is what I expect. Alright. Good. Good to see you reaffirm the guide this morning, so that is helpful. Maybe if you can spend a little bit of time on the industrial equipment business the trends that you saw in the quarter, and then I thought Matt you talked a little bit about the strength in the second half. So maybe provide a little bit more color on what discussions you are having with customers with the activity that you are seeing and the backlog?

Sure, Ajay. We as you know forecasting our industrial equipment group can be a bit of a challenge. We target in that business a 50% revenue split between original equipment and aftermarket. Typically we have found that considerable activity in the aftermarket is a good sign as it relates to equipment orders. What has probably surprised us, we have seen very, very strong aftermarket now for over a year, and the original equipment market has been a little slow to respond. Having said that, as I mentioned in my comments we are seeing lots of quotingactivity, increased quoting activity but what we have seen as general trends, one is ongoing significant softness in some of the European and Asian markets, number one. Number two, a key end market in steel still being soft. While steel is a significant end market for us or an important end market, it is a significant end market for the new equipment business. Aftermarket can often be, it is important in aftermarket too, but it can be a more significant share of the new equipment business.

So those two headwinds I think have caused people to be just a little more cautious as they think about allocating capital for expansion. Despite how active their businesses are. I think it is a theme we see here. I can understand where people are coming from. We are focused on equipment investments that increase productivity and have short paybacks, with the exception of general aluminum, we are very cautious about true expansionary dollars. That mindset still exists, and I think has put some tension on the age old relationship between aftermarket sending signals for strong growth on the equipment side. Having said that, it will happen, and I think that every month it goes by I think we have a better chance of seeing a pickup in that revenue, and it is supported by significant increased quoting activities. So there is some risk. We have identified a risk in our plan and our forecast for the year unquestionably, but it is one in which we think we can manage.

Good. So that is very helpful. Maybe a little color on assembly components. Margins came in better than where we were, any color on what drove the improvement, is it inclusion of Bates, it sounds like the aluminum business also did better. So just a little bit more color there, and then your expectations in the second half is double-digit kind of how we should be thinking about margins there?

Well, let me just talk about the revenue side of the picture, and then maybe Matt will want to comment on the margins and so forth. Just revisiting the sales we had talked about, the new sales of approximately $125 million that we were bringing online. That was three different platforms and the first platform to come online, of course, was the Dart, followed up by the now developing product line or ramping up for the Jeep Cherokee which we have a much better feeling for historical sales. The Dart was a tremendous investment by Chrysler, and it hasn't received or hasn't had the volume that we anticipated or they anticipated off a considerable amount at that point so far.

So the revenues would have increased more dramatically, except for the slowdown or slow start of the sales of the Dart as being very specific, but it is important when you are taking platforms in these major auto companies that you select the right one. The car quite frankly has been readdressed from the standpoint of transmission, and apparently the power. So we expect that to increase. You can see that they are doing a tremendous amount of effort to get that volume up as a company. Their platforms are, they are having great success across all of their platforms.

I think they will solve the Dart as some perceived it underpowered in the transmission. They have millions and millions of dollars in this platform, so all of us that are buried in the supply base are suffering a little bit relative to the initial volume, but as we speak the new platform, the second platform of the three, which is connected to the Jeep Cherokee, which is a more predictable product line historically, so it could have been better. And Matt, do you want to speak to the margins.

Sure, Ajay, one of the things we need to be, the second quarter was an extremely good quarter for both our fluid routing business and our plastic and rubber business. Since that represents the lion's share of the segment earnings, that was a really, really positive story by a team that is executing there very well, as it relates to not only quality of earnings, but also in terms as you mentioned a small acquisition or two.

So we do have I know we mentioned it before, some programs rolling off at FRS which will negatively impact the second half. So the FRS business in particular has which has been performing extremely well does have some headwinds in the second half, which kind of belie our general comment about our consolidated path. I have no concern that we will be able to manage that. Ajay, I know you will remember those business losses were embedded at the time of the purchase. So we were fortunate enough to hang on to those as long as we did, but they will cause a little bit of pressure in the second half.

Got it. So the double-digit that we saw is something that was nice in the quarter, but it is more the normal rate of margins that we should be thinking about for the rest of the year, is that right?

No, I think it is going to be a lot, the margin is going to have a lot to do with how quickly we see, this segment is going have to become more balanced from a margin perspective, and to the extent we see improvements at general aluminum I think the earnings margins are the kind that we should expect. Although that balance is going to be interesting over the next two quarters.

Good. And then one more from me before I pass it on. Ed, on the long-term goals that you talked about a few months ago, is there any update in terms of either the work that is being done internally towards achieving those goals, or in terms of newer metrics that you are willing to share on what that topline goal could mean in terms of margin improvement and such?

Ajay, we are still committed to what we call the N5 plan that is reaching $2 billion by 2017, which is a combination the math is 12.5% per year. Quite frankly before we announced that, what appeared to some as aggressive the Company had grown over 11% over a long, long sustained period of time. So 12.5% and we think in terms of for all practical purposes 6.5% and 6.5%, or 5.5% or 5%, but we think that the combination of organic and through acquisitions and when I talk about acquisitions, we talking what we feel are bolt-ons. Acquiring companies that fit right into one of our current platforms.

We are not going to buy any hotels. So, number one, we have a portfolio of potential bolt-ons that we pursue on a full-time basis, and as far as organic growth we have talked about obviously the organic growth that we anticipate substantially in the aluminum or the assembly component parts of it, and quite frankly we are starting to get traction in the cross-selling between the supply technology and our rubber and plastic business. So we feel strongly that we are on goal relative to accomplishing that. And I think my comments, I am excited about the opportunities that when you are out this talking about growing and out there talking about organic accomplishments and acquisitions, the harder you work at that particular goal the more opportunities that present themselves. So I think we are right there.

Good. Thank you very much.

Thank you very much.

Thank you. Your next question comes from the line of Steve Barger from KeyBanc Capital Markets. Your line is open.

Hi, good morning guys.

Good morning, Steve.

Sorry about the background noise. I am on the road. Just a couple of quick questions. I agree it is good to hear you reaffirm the guidance. If I annualize your first half results it is about 370. Is it reasonable to think given your view that the back half gets stronger, that you are confident in the midpoint or higher of the guidance range?

I am not sure that I would given some of the moving parts and as we discussed in the past the relatively few number of outstanding shares. I am not sure I would want to say more than we are very comfortable with that midpoint.

Okay. Some of the momentum that you talked about in supply technologies, in terms of the truck and the power sports, has that continued into the quarter, and is there any notable increase in some of the other end markets that you guys serve as you look at how pull-through is happening in supply technologies?

That is a pretty comprehensive set of customers. We highlighted some that we feel have the potential to improve in the second half, and we are seeing some support from most notably a little bit from truck. Having said that, it is I think we measure our business in a couple of different ways. Most importantly average daily sales. Certainly we expect a little bit of additional support there and momentum in the second half. Having said that, third quarter traditionally has less ship days, as you know. I would want to highlight that we expect things to improve, both from a new business standpoint and from a little bit of lift from the economy in the second half in some key markets. But I wouldn't want to characterize it as overly significant.

Okay. You gave a good explanation about the SG&A increase in the quarter. Talking about some of the compensation and other things. I just was curious is there any nonrecurring, any diligence costs or anything like that in the number that might come out in the back half? And just how should we think about the dollar levels in the next couple of quarters?

I will let Scott comment more specifically on the dollar levels. What I would tell you, Steve, is the wild card in the second quarter results and often can be, is managing medical expenses, and I have got to tell you, we expected this year and I think we are seeing, an increase in medical costs. So I think we are managing them well and doing what we do. When you try and really break apart our SG&A numbers that has been a trend which I think we felt from a balance sheet perspective a little more meaningfully in the second quarter.

Yes, I would tell you, Steve, there is really not any large single one-timers in the second quarter that you might back out. But you looking at total revenues, I think somewhere in the mid-9%, 9.5% of revenues might be a good gauge for you.

Okay. That is great. And the Bates acquisition last quarter, any update on how the integration is going? Has there been any positive surprises, or just how you are you thinking about the property since you have it in the portfolio now?

The Bates acquisition as we indicated at the time was a nice bolt-on to our existing rubber and plastic business, and we felt there were some synergies, and we are hitting our plan.

This is Ed Crawford. I think I would like that particular acquisition to be looked at as kind of the profile of what we look for. It is very important that we understand that we kind of look to, number one, new customers. We look to number two, a business we really understand. Number three, we look to the fact that if you are in the rubber business or plastic business and you acquire someone in a similar business, you normally will get some ultimate increase in margin and profitability because of buying. So this is a wonderful plant, located 40 miles from our other plant so our original management group in the plant we owned now is responsible for this plant. There is consolidation. We are buying rubber in higher quantities, that is an advantage.

And most important, we got a lot of new customers. So every single time we make an acquisition, what we call a bolt-on, there are certain characteristics of that plan that are important to us. Because we expect to buy at a value, but more importantly we expect to be able to increase the margins through the things that we have become experienced at, and analyzing and seeing in the acquisition process. So we really have a pretty tight view of bolt-on, and Bates is a perfect example of what we hope to continue to do as we strengthen the Company towards the N5 goal.

Sure. And since we are on the subject how is the slate of acquisition targets out there that meet that criteria? Are you continuing to find attractive candidates that you can do some work on to see if they fit into the portfolio?

It is interesting. We probably have never seen more opportunities. That doesn't mean better, more opportunities. And it is important that again in our strategic plan we happen to think Europe has interest, because they have got a lot of problems over there and a lot of business that are pretty historical and good companies, and something that would have traded at 7 or 8 times earnings. That is not the case any more. They can't finance over there. They can't borrow money over there. They don't have capital over there, and some very good businesses pop up, but they want to start at the multiple of 7 or 8 and, of course, we are not interested in that. If it is not accretive it is not part of our bolt-on process. So we see a lot of opportunities and we process them, and we are not embarrassed to buy a company that has got $10 million if it as plug-in or something larger. But these have been nice sized. We like them. But lots of opportunities. Not quite frankly more people on the street, but you have to really look deep, but the quality companies over a period of time especially as tight as it is right now, and it is hard to be out there but we love the industrial diversification of the Company, so we have got a lot of acquisition opportunities. We just have to be smart and pick the right ones.

Alright. Thanks for the color, and I will get back in line.

Thank you. Your next question comes from the line, I am sorry from I pronounce your last name, but Matt Vittorioso from Barclays. Your line is open.

Matt Vittorioso. That was pretty close, though. Good morning guys. Congratulations.

Good morning, Matt.

On another good quarter. Just on the back of that most recent question, you talked about having gotten your leverage down below 3 times on a net basis. Always out there looking for decent acquisitions. What is the target on the leverage front? Will you look to keep it below 3 times? I mean you have been pretty disciplined in what you paid for acquisitions. Maybe just sort of talk about your thoughts on leverage?

Matt, hey, it is Matt Crawford. I think that we first and foremost evaluate our opportunities since we allocate the significant amount of our investment dollars either to post-synergy very reasonably priced acquisitions, bolt-ons, and since we allocate a portion of our organic growth capital to productivity investments and things with pretty near-term paybacks. We don't necessarily think that when we incur, when we invest capital that they will be that damaging to our goals. In terms of a goal so as we grow, and one of the reasons I made that point is I wanted to support the thinking that hey, we can grow and still not leverage the Company meaningfully. But certainly we would like to see our leverage ratios, we have accumulated a little bit of cash, but certainly we like seeing that net debt ratio in the 2s, that is great.

Certainly depending on where the cash is held and how it is held, we think about our leverage somewhere in between net and gross and having a 2 in front of that is a nice place to be. It allows us to be at the margins slightly more aggressive. But certainly we feel we can manage the business appropriately south of 3. So that doesn't mean we won't take opportunities if we see them at a slightly higher level, but once again, we don't see those as necessarily being leveraging moves.

One additional comment to that is the acquisitions we look and again the profile I think that is important, should be important to everyone, what we mean by a bolt-on, and what we mean about our view of acquisitions, because we are going to have to make a few to reach our $2 billion or N5 goal. The type of acquisitions, a part of that is worth mentioning is that historically where five years ago we would have acquired a company in which we would consider a turnaround, okay. We are kind of out of that business. Now we are talking about buying companies that immediately are profitable, and could be more profitable after our business approach is put in place. That is one thing that pushes off the leverage quickly. We might leverage up for a moment there, but historically we clearly understand and there is a difference between buying a company and improving the earnings, versus taking a company and turning it around. It might be a greater investment on plan one, but we are not in plan one any more.

We are in plan two. We buy things that are operating, that are profitable, that fit in, and have all of those characteristics. The really only exception to that has been recently the aluminum business, where you have to front end load the CapEx to get the volume, and you have the expenses. You take the order, you invest the money, you got the CapEx, you have got to get if in place and a year later, 14 months later in comes the revenue and the profits. So when you are investing in the aluminum business as a we have, it might look like you are spending money and getting, the relationship between is how much money you are spending and how much the EBITDA goes up. So there is a drag in a couple of these businesses, like supply technology, where you take a customer, a new customer and $50 million or $40 million, you have to put up the working capital of $15 million in advance, and then a year later you get the return. This is built into, hopefully these thoughts are important to everyone, because there is a lot of discipline to the two subjects that I just talked about.

That is helpful color, I appreciate that. The one segment we talked about it at some length on this call, but the engineered products group obviously when that thing gets going, you can really see some good improvement in EBITDA. And there are a number of different products being produced or manufacturing in that segment. Is there anything you could say as far as like what is working well right now, what products are you seeing decent demand for, maybe what products that have done well in the past, are still kind of lagging, and any deeper detailed color on that segment, because when it gets going it could be a pretty big piece of your EBITDA?

I guess I talked a little bit in my comments about what wasn't working. Maybe I could highlight a little bit more about what is working. I will think there is a, the forge group continues to be a high point relative to the performance there. As you know, we focus there on aerospace and rail products, and we have done well there. So that has been a consistent performer for us. Incrementally it didn't show a lot of improvement year-over-year just because the darn thing is doing pretty well.

Also what continues to do well is the aftermarket part of the business and the equipment space, that continues to do well. And then I think on, I picked on I think what are the negative parts of the original equipment business, but what I will talk about that maybe is doing well, is certainly North America. North America and particularly in products related to heat treat, smaller orders, not necessarily orders that I would call capacity building, but certainly those types of orders that support productivity improvements in customers that might for example be in the auto space, would be a good example. So there are some good stories. I talked unfortunately about the headwinds in the international markets and particularly steel. There are some positive stories, too particularly in terms of North America, and in terms of smaller more productivity oriented purchases.

Okay, great. For the back half of the year should we expect margins that look like Q1, or more like Q2? I know you said you think the back half will be better, so maybe we are trending back towards the 15% to 16% margins in that segment or what are your thoughts there?

We anticipate as I mentioned a couple of times on the call, we anticipate some improvement in the order book on the equipment side. So the rest of the business is doing pretty well. If we can get some level of large order activity in the second half, whether it be in the oil and gas end markets, or a little resurgence in steel where we are beginning to see some quoting activity again, that would be pretty found money because, to be honest with you, this management team in that business, particularly the equipment business, has done a hell of a good job managing a big business with a global footprint, without getting those big orders that candidly absorb a lot of overhead. So these guys are doing a nice job, and if we could get a little wind at our back with a few big orders that would be awfully beneficial to our margins as well.

Great. Thanks again, guys.

Thank you very much.

Thank you. Your next question comes from the line of Jay Harris from Axiom Capital. Your line is open.

Good morning guys.

Good morning Jay. How are you today?

Very good. I am wondering if you could provide us with a little discussion in terms of supply technology about the vertical markets, seasonality, and where you need to grow the business in a significant sense, which vertical markets are you looking at?

We don't really, that is an insightful question, because I think we used to and still focus to a large extent on looking at key end markets, and using institutional knowledge here of how to expand among that competitive base. We still do that. But candidly where you would see most of the energy today, relative to our sales group is to focus on two other agendas, which I think are more impactful in the medium to long-term meaning 2014 and 2015. Number one, I would tell you that we are seeing, focusing on the introduction of new parts to our key customers. We have talked a lot about the introduction of some of thehose assemblies, et cetera, that is coming, and it is good margin business. Secondly we have talked a lot about leveraging our domestic relationships with key customers in Asia and Europe. That is an interesting opportunity for us again because it is unique. We live in a world where North America, we are a premier supplier, but there are competitors. There are very few competitors that can go in a front door of a major OEM and say, we can supply you anywhere in the world you are doing business, or to your supply base or contract manufacturers. So those are the themes I think that we are focused more on right now, and those are going to be the significant drivers of our growth path. Maybe not as significant as we would like for 2013, but certainly will be significant as we move forward.

You mentioned in your earlier remarks that ag and truck business were important in the second quarter. Do they stay strong in the third and the fourth quarter, or is there a seasonal decline here? Add some color to that?

Well, certainly as it relates to truck as I indicated we expect a little bit of help there. Truck was very strong in 2012, sequentially we are seeing some improvement as I discussed in my comments. Ag is a little more difficult because there is some seasonality there. Obviously the late winter and spring is an active time, particularly for those that are more on the residential and commercial lawn care, and so forth. So that one I think you will see some seasonality. Obviously we hope to offset some of that with typical seasonality in some of the IT hardware business, which tends to do well towards the holiday season, and so forth. Baked in the number there is seasonality, Jay, as we have discussed in the past, having said that, somewhat by strategy, somewhat maybe by luck, we have balanced that pretty well over the years.

You are running at about a $500 million annualized rate in supply technology. Where do these new thrusts, hose assemblies, new parts, expanding with some of your customers into the Asian region, where could that drive the revenue base?

I believe we have talked comprehensively about our long-term, our five year plan taking the business to just over $2 billion.

On supply technology?

On and I guess what I would be willing to tell you is, we expect supply technology to be able to track to that goal.

Okay. Thank you.

Thank you.

Thank you. Your next question comes from the line of John Balm from ParkOhio shareholders. Your line is open.

Good morning guys. How you are you?

Good morning.

Good morning, John.

I want to congratulate you on the year end debt levels. I know you guys have been working very diligently on that. A question on the year end debt levels. Is that harvesting of receivables, inventory pay down, or is that kind of a long-term goal to leave it right there?

Our fourth quarter we do expect to build a little bit of working capital but if you go back to some of Matt's comments about operating cash flows, our business generates strong operating cash flows through earnings. So that will continue. That is what is driving the cash position that we are building to at the end of the year.

Very good. Thank you. And final question probably to Eddie. Eddie as you look at your five year plan right now in terms of the major industries, would this be a layout on the overall footprint of business, or are you looking focusing still auto and oil and gas, or what type of drivers will it be in the industries to achieve that five year plan? And again, congratulations on a good quarter and a good year. Thanks guys.

Simply we expect all of the operating units to participate in reaching the goal. This is not about one particular unit. Maybe it will be a winner as relative to, if you want to classify that way as we move to the $2 billion, but every unit, the forging unit, every business unit in the Company we expect to grow at that 12.5% combined organic and acquisition rate. So it won't be one success. It will be a lot of successes, and this is very important culturally here that everyone expects to do the same, and no one is looking over the shoulder hoping the other person is going to win for them.

I feel good about the results because I believe in our people, and we have a proven track record of reaching what we state as our goals, and that is through the ability of our individual operating units. I like decentralization. I like our industrial base. I like the fact that we are diversified. I like the fact that we have got customers worldwide, and we have a lot of touch points. That gives us an opportunity in every corner to be successful and reach that goal.

Thank you.

Any other questions?

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

Thank you very much on behalf of the Company and all of the stake holders and the employees. We thank you for support, and we are leaving the conference room and having our annual picnic here at the corporation here today, which I think is important that we share our successes with all of the people that really make it happen. Thank you very much. Look forward to speaking with you, and seeing you in the future. Good day.

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