Park Ohio Holdings Corp (PKOH) 2015 Q3 法說會逐字稿

Good morning and welcome to the ParkOhio third-quarter 2015 results conference call. Today's conference is also being recorded. (Operator Instructions)

Before we get started, I would like to remind everybody that certain statements we make on today's call 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 risk and uncertainties may be found in the earnings press release as well as in the Company's 2014 10-K that was filed with the SEC.

Additionally, the Company will discuss as-adjusted earnings and EBITDA. As-adjusted EBITDA earnings are not measures of performance under generally accepted accounting principles. For a reconciliation of net income to as-adjusted earnings, and for a reconciliation of net income to EBITDA as defined, please refer to the Company's third-quarter earning release.

With no further ado, I would now like to turn the conference over to Mr. Edward Crawford, the Chairman and CEO. Please proceed, Mr. Crawford.

Thank you. Good morning, ladies and gentlemen, to ParkOhio's third-quarter 2015 conference call. I have with me today Patrick Fogarty, the Chief Financial Officer, and Matthew Crawford, President and COO.

Matt, I would like you cover the activities for the third quarter.

Okay. Good morning, everyone, and thank you for joining us this morning. We are pleased with our results for the third quarter and excited that we set three new Company performance records as of the end of the quarter, September 30.

First, we set a new record for 9-month revenues: $1.1 billion; a new record for 9-month EPS of $3.04 as adjusted; and a new EBITDA record of $104.4 million for the first 9 months. We attribute these records to our strong diversified portfolio of businesses combined with our ongoing expense control in the face of continuing challenges in some of our end markets.

Our US GAAP earnings in the third quarter of 2015 was $1.06 compared to $1 in the third quarter of 2014 and the second quarter of 2015. Our as-adjusted earnings for the third quarter of 2015 was $1.07 per share compared to $1.15 per share in the prior year and were up $0.03 compared to the second quarter. EBITDA as defined was $36.9 million in the third quarter compared to $35.8 million in the third quarter of 2014 and $34.1 million in the second quarter of 2015.

Let's begin our detailed discussion of third-quarter results with revenue. Net sales increased 6% to $364.4 million compared to $344.6 million in the prior year. The increase in net sales is attributable primarily to the 2014 acquisitions of Autoform and Saet.

Gross profit earned in the second quarter was $62.3 million compared to $60.6 million in the third quarter of 2014. The gross profit margin was 17.1% in the third quarter compared to 17.6% last year. The decline in gross margin is largely due to the continued margin impact of lower aftermarket new equipment sales in our engineered products group, as the demand from our oil and gas and steel customers continues to be at very low levels.

On a sequential basis, our gross margins improved significantly from 16% due to improved margins in our assembly components segment, which we will discuss later.

Consolidated SG&A expense of $34.9 million are up slightly compared to the prior year, but SG&A percentage expenses as a percent of net sales improved to 9.6% versus 9.9% last year. The improvement in SG&A as a percentage of sales is a result of reduced professional fees and lower SG&A costs as a percentage of sales from acquisitions.

Interest expense increased by $500,000 to $7 million in the third quarter compared to the third quarter of last year due to an increase in average borrowings to fund our late 2004 (sic) acquisitions and current-year CapEx and working capital needs. Our effective tax rate for the third quarter of 2015 was 35.3% compared to an effective tax rate of 37.2% last year. We estimate our 2015 full-year effective tax rate to be approximately 35%.

As we have discussed on previous calls, the effect of foreign operations and the current-year conversion to US dollars has affected our business. We estimate that our year-to-date 2015 budgeted revenues were unfavorably impacted by $23 million. Year to date in 2015, net income year to date was unfavorably impacted by $1.4 million or $0.11 per share from the effective currency changes since last year.

Now I will look at the segment results. Supply technology's revenues represented 39% of consolidated revenues during the third quarter. Revenues were roughly flat from the prior year and totaled approximately $143.1 million.

We continue to see strong demand in automotive, heavy-duty truck, semiconductor, and power sports. While revenues from other end markets, such as HVAC, agriculture, and ED&C were down. Given the current environment, we are monitoring closely the production schedules of our customers for the remaining business days of 2015, and will continue to manage the effect of lower commodity pricing on the business.

Segment operating income increased $800,000 or 6% from the third quarter of the prior year to $13 million. Segment operating income margin was 9.1% for the third quarter of 2015, which compares favorably to last year's third-quarter segment operating margin of 8.5%. This improvement was driven largely by improved operating leverage and strong execution in our facilities that service heavy-duty truck and auto-related customers.

Now let's look at the assembly components segment. Assembly components revenues for the third quarter represented 41% of consolidated revenues. Net sales increased $27.7 million or approximately 23% to $149.3 million in the third quarter of 2015 compared to 2014. Approximately $16 million of this growth is attributable to the Autoform acquisition and the remaining increase is attributable to our aluminum business and the strong continued performance in our fluid management business.

Business conditions continue to be strong in this mostly automotive segment and we continue to quote actively in fluid delivery and gasoline direct injection systems, rubber and plastic components, and aluminum products, both here and abroad.

In the third quarter of 2015, segment operating income grew $6.7 million to $17.7 million, which was a significant improvement over the prior year. Segment operating income margin in the third quarter of 2015 was up 32% at 11.9% compared to 9% last year. Much of the improvement is a result of the long-awaited improved performance at General Aluminum as well as the Autoform acquisition, which is performing well and monthly revenues are expected to continue to increase based on business previously awarded.

Now let's talk about engineered products. Engineered products revenues represented 20% of consolidated revenues. Net sales decreased 9.5% to $72 million. Our equipment business continue to be affected by low aftermarket demand and low net margins on equipment builds.

Low demand from our oil and gas, tubular steel, and military/aerospace customers continue to be challenging. Specifically, our aftermarket business declined 19% in the third quarter and 12% year to date compared to last year.

Within the aftermarket product line, oil and gas aftermarket product sales declined 51% compared to the third quarter of the prior year and 26% for the 9-month period. Equally challenging was our forging business during the quarter, as revenues declined to 13% due to weak military and mining demand as well as significantly reduced locomotive builds due to recently changed emission standards.

Segment operating income decreased $7.2 million to $4.3 million compared to the prior year, and decreased $900,000 compared to the second quarter. In addition, segment operating income margin decreased to 6% in the third quarter compared to 14.4% last year.

The weak demand pattern for oil and gas, capital equipment, and aftermarket products continues to significantly affect this business segment. We are working aggressively to reduce costs and implement operational improvements as we manage through this extremely tough environment.

Next, let's discuss cash flows for 2015. During the first 9 months of 2015, net cash provided by operating activities was $11.7 million after funding working capital for our growing supply technologies and assembly components businesses.

In addition, we invested $31.1 million in equipment to fund future sales growth, primarily in our assembly components segment. We expect cash flows from operating activities for the rest of the year to be strong, as strong earnings continue and working capital is reduced.

We estimate full-year operating cash flows will approximate between $45 million and $50 million. Net CapEx are estimated in the range between $35 million and $40 million during 2015. Cash taxes are estimated to be at $20 million for the year.

Overall, we are very pleased with our third-quarter performance. We continue to execute our growth strategy, which includes international expansion, introduction of new products, and continued investment in highly engineered and proprietary solutions.

As we forecast our financial results for the remaining part of 2015, we believe the continued headwinds related to several key end markets in our engineered products segment will persist and the demand on non-automotive end markets in our supply technology supply segment could soften slightly below our original expectations. As a result, we are adjusting our previously stated guidance range down to $4.01 to $4.12 on an adjusted basis.

Thank you very much.

Well, thank you, Matthew. And I now would like to open the conference call lines for questions from our attendees.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

It's actually Ken Newman on for Steve. Congrats on the quarter. First, on supply tech, it put up flat revenues this quarter. Is there any end-market leadership change which would have a big impact on margins, either positive or negative there?

This is Matt speaking. I would not define it as a change in leadership. Leadership in that business continues to be -- while automotive isn't a huge part of the business, continues to be in automotive. Also, leadership continues in the heavy-duty truck area, which can often provide a poor margin mix, but at particularly high volumes we do get some operating good leverage.

So no, I would not define leadership rotation as being an issue, per se. I think we continue to be led by the areas we thought. I do think that the well-documented uncertainty or even softening, depending on who you talk to, in a plethora of smaller industrial industries, both domestic and globally, is sort of seeping into our view of the business.

Got it. And then I guess bringing up the international business, how did international hold up at supply tech in Europe, specifically? How are the contributions from the recent acquisitions?

Yes. We continue to be happy with the integration and performance in those acquisitions. Candidly, we are probably not exactly where we expected to be, but we are pleased with where they are and how they are contributing generally at supply technologies.

Got it. And so I guess to clarify then, you're not seeing any incremental weakness in supply tech from Europe or just Europe in general. Is that right?

No, no. I think Europe has held up pretty well.

Okay. And then for assembly, you had some nice margin there. Is that more of a function of mix or I guess could you split out any kind of benefit you are getting from operational initiatives at the plant level? And maybe also talk about the sustainability of that margin.

Well, the -- this is Ed. The assembly components is doing very well. The numbers speak for themselves. We have been expecting for some time -- and it has been well over two years. We are finally getting the absorption in the revenues and the input to our manufacturing facilities.

These five plants have been running underutilized for a period of time where we have ramped up our platforms. That is clearly the case now. We are very, very pleased that that part of the business -- the auto part of the business is very, very strong.

The other components of that are also in areas that we are enjoying. Gas injection, as pointed out, as well as turbocharging hoses. So it is a good time to be in the auto industry. It looks very strong. We are open to production and sales in China with GM. So a lot of good things are happening there, but is very robust and, quite frankly, in some cases, the platforms are outperforming what we expected. So we see that continuing clearly through the end of this year, hopefully into next year.

But that has a very important part of why we are able this year -- and we talk about silos here; three silos. Clearly, the engineered products is on a weak foot. When you are in the gas and oil business and the aerospace and steel, that of course all those segments are down. But on the other hand, the assembly components is doing a terrific job along with supply technology.

So when we talk about the Company as a diversified industrial company with three separate operating silos, we are talking about diversification of customers, international sales. So we are very, very proud of this being an example, again, where there are two silos -- clearly have been able to make up a deficit -- a very deep hole in our most profitable historical business, which is the engineered products.

So it is great to have assembly components; really robust and really moving it this time. It is a long time in coming, but it is right here at the right time.

I would only add -- this is Matt. That is a mostly automotive segment. Automotive is doing pretty well. And the results were very good largely because the intersection of getting our act together a little bit at General Aluminum, and candidly, Autoform wasn't in most of the results for the third quarter last year. So it wasn't in any of them.

So Autoform was a significant acquisition. It was built to be a business with significant backlogs that we expected to contribute on an accelerating basis. So on a year-over-year comp basis, that didn't even exist last year. So I think that there is a couple nice stories that put together add up and should be reasonably sustainable to the extent builds stay where they are.

Very helpful color. I guess moving on, but keeping on assembly, on prior calls you talked about having a less rational competitor in the pricing front. I think that has changed. Can you talk through what you are seeing now and how you are reacting?

Well, as we have indicated, a lot of pressure was being put on the pricing by a private equity group. That company subsequently filed for chapter 11 and is going through the process now. And we feel over a period of time here, a lot of those assets will go by the wayside. Some will be sold.

But it is all good for what we consider the competitive landscape to have people in it that have been in it for a long time, that are really operating people. So we are not happy for them or disappointed, we just -- it works in our favor as it worked against us on the pricing model for two years.

Got it. And then --

I'm sorry. Our next question comes from the line of Jay Harris, Axiom Capital.

There are several vertical markets that you referred to in the introductory remarks that are suffering cyclical depressions: mining, oil and gas. Are there others?

Jay, it's Matt. Steel, military, to add a couple.

All right.

I would say also agriculture, which -- yes. So no, I would add a few.

Okay. What I would like to get is a -- when you look at all of the aggregate of all of those vertical markets, how much were your revenues down in dollars year over year?

Well, the most significant shift -- I mean, we don't have that number, but I would comment to you that in general, the one that has provided the largest impact in the year-over-year numbers is oil and gas. And we have discussed, I think, the significant shift in aftermarket business, which is our highest margin part of our business. And it has been material to our overall performance -- in the tens of millions of dollars, as we have discussed.

Well, the reason I wanted to lump all those together and get a dollar value -- aggregate number is because it at some point in the future those markets will start to improve. And it will give us a measure of the upside that you might be facing at that time. Is there any way you could put that number together and follow up with me?

Jay, I am going to do it this way. I am going to make it terribly simple for you. Our engineered products segment is the segment that is damaged by every market segment that we just mentioned. So there is a large concentration -- exceedingly large concentration. 90% of the damage being done to ParkOhio is in that segment.

So if you were to take current performance, which includes the Saet acquisition last year, which is a positive, and look at the performance that we have seen in that business historically, I think you could do a pretty good job of capturing the opportunity you are looking for.

Jay, another pass at it would be for the first nine months, the revenue in engineered products is down $18 million. That historically had been our most profitable EBIT silo: let's say, 14% type of EBITs -- 12% to 14%. And when you take out $18 million with that kind of profit, I mean, just take $18 million and we are at 7.5% -- I am looking at the math. It is 14%, there is at least 6 or 7 points. So at 6 or 7 points, so it is 6 times $18 million. That sounds like a lot of EBIT.

It is.

Okay. So to your point, this is why we like the company we are building. We are going to set record earnings again this year in both revenues and earnings. And we are dragging along the Company -- or the silo that for the last 5 years, has been the whole Company relative to 14%, 15%.

So when you can take on a whole of $18 million in 9 months with that type of margins and still accomplish what we are talking about, it says the rest of the Company is going very, very strong. I would like one day -- and I agree: it is going to come back. And anybody that thinks that the oil and gas opportunities, the agricultural opportunities, that Caterpillar is not coming back, Jon Deere is not coming back, oil and gas is not coming back, and all the steel companies, all that money has been spent. In all markets, this is all going to stay down.

And we did not expect anything from this segment because we knew as early as June of last year what was going to happen. But it is going to come back. It will start coming back with parts and it will start coming back with equipment.

And when that comes back, I hope the things that are really booming now -- auto for us and recreation vehicles, and all these other Company things that are adding to our revenue and our earnings, and allows us to pick up a really major setback here. But it will be back. These companies are not going out of business. We haven't lost market share. They are just sitting there and they are coming back. When they come back, it is party time.

That has been somewhat helpful. Thank you, gentlemen.

Steve Barger, KeyBanc Capital Markets.

Sorry for going on a little bit too long on the first round.

We didn't cut you off, but you had another couple hours and we got to get going, okay?

I understand. I guess you touched on it a little bit and I know you don't want to give guidance for 2016, but I am just trying to get a directional sense here. If prices for oil stay where they are and CapEx budgets remain under pressure, it is going to be tough for engineered. But if that happens, do you think you could drive enough organic growth in the other two segments to still put up a positive organic number for the Company?

Well, I will give you two answers to that. Number one: you probably have noticed in our capital spending has been very high this year. We haven't announced an acquisition year to date, but we have made substantial investments in CapEx to grow around new orders, new business.

So when you start spending $40 million in CapEx, I would hope that it is all not maintenance and it is for business going forward. And that is exactly what it is all about. And obviously, we can't give guidance, but let's go back 8 or 9 or 10 years and everything would indicate that next year I have no reason to believe that we are not going to have increased sales and increased EBITDA. That is what we have been doing and that is what we continue to do and that is what it is all about. [Steady] progress. Because some of these units will help. Things will be better.

Got it. And then just one more from me. I guess the question is on deal multiples, specifically for the oil patch. But I guess also across the board, trailing 12-month EBITDA will be coming down for a lot of these companies. Have you seen that being reflected in multiples yet?

Well, let's put it this way. In -- let's start with the oil patch. Any good company in this business 3 or 4 years ago, you get 15 times EBITDA. Well, the same thing is about 4 right now. So you got to be careful here where you think you get a bargain.

But multiples are, again, being driven by private equity's access to very low capital. And that, sooner or sooner, will come to an end, hopefully. But we will not -- historically, and will not -- we have done 86 acquisitions here [pay up] for a company, number one. Any acquisition we make has to grow as fast as the rest of the Company is growing or faster.

And we think we have got a great company and I think we are proving it this year. We haven't done an acquisition this year and we are still firing on all cylinders. We look forward to 2016. So acquisitions: we love them, but we also have turned our attention to organic growth, or else we wouldn't have spent $40 million in CapEx buying equipment and getting ready for the future. That is definitely organic growth.

John Baum, a private investor.

Good quarter. Glad to see that Mr. Fogarty was elevated to CFO. I will say it is a nice addition [but that he is already] as part of the group, but nice to see that the triumvirate has been ironed out right there.

Most of the questions have been answered, but I guess my question and focus is kind of on CapEx. Is this $40 million-ish -- is this going to be a new level? Are you kind of front-end loading this? And how does that look compared to depreciation and amortization going forward?

John, this is Matt. We are not in a position to forecast next year. It is -- as you know, because you have been around the business a long time, we used to have a pretty predictable CapEx number in sort of the $12 million neighborhood. The last several years, obviously the size of the business and the nature of the acquisitions have put us in a position twofold.

Number one: I think that fundamentally, we have invested in business -- businesses that require a little more CapEx. We have invested more heavily in the manufacturing side of the business. Not that supply tech hasn't grown. But those require a little bit more CapEx. So I think just the scale of the business and the slight skew towards more manufacturing has elevated what has been that traditional number. But still, nowhere near $40 million.

I think what you are really seeing is a number of opportunities. And disproportionally, they are focused in the automotive area. And disproportionally, they are focused on two fundamental strategies that we are pursuing.

The first is international expansion. We believe that regardless of the NAFTA production rates that our ability to be -- to attack what is a more significant share of a $90 million global marketplace, our ability to expand our manufacturing environment and sales and engineering environment globally, we have done a lot of that. So it has been expensive I think to do that, but I think the upside is dramatic relative to being a global supplier of these products.

And we are seeing it in terms of the quoting activity and the awarded business. I am very proud of what we have done in Mexico and in China in particular. So I think that is one.

The second thing -- and once again, those are costly. They are not necessarily permanent, but they are costly. These are startups. Secondly, I would articulate that the nature of our strategy around emissions in our fluid management business, as well as our well-documented investment in General Aluminum, to grow the business, to increase the ability to supply these aluminum parts that reduce the weight of the car that help meet the reduced -- the increased mileage requirements. Those are once again, particularly aluminum, in a minority part of our business, but one in which we see opportunity that is CapEx intensive.

So that piece, once again, I view as not permanent. So I do think we are significantly above the new normal this year, given those two fundamentals I just outlined. But I would also tell you that we are not a $12 million CapEx company anymore. Does that answer that there, John?

Yes. Fantastic color. And just one more quick one and I will toss to Eddie right here and then I will hang up and listen more. Eddie, I know I have walked the plant there with your aluminum body with the Ford I guess 150. Can you just give a little bit more color?

I mean, we get today the auto sales are at record highs. How does that correlate with the aluminum products and F150, the light trucks, and autos also, I guess, going forward and looking at some of the new platforms? Thank you.

Thanks, John. That is a very interesting question. We have a strategy around the auto area. We are excited and Matt made it very clear, which is interesting. We are talking about the cars around the world that's in China and everywhere else where we can compete with some of our product lines, like the gas injection is important. Clearly, the fuel systems that they are already shipping in Shanghai as we talk about it.

So it is sad to hear is they're not to continue to invest in the aluminum casting and machining side of it. That was -- the thinking is let's have more platforms on the cars rather than one big, big platform. So when you think about the aluminum casting, which we talk about a lot, but the gas injection for this up in the engine, the turbocharged hoses put us up in the engine. They have got this little four cylinders that act like V-8s. That is turbocharging. Gas injections, emissions, more miles per gallon, fuel filler systems, the gas tank. And of course, the castings for the knuckles and so forth.

And so we have got four or five really strong platforms across the board. So if the model numbers come down, we are still -- if we keep getting more on the cars, we're going to do better. So we are not going to be hit by a slowdown. If it goes from 12 million, 18 million cars to 16 million or 15 million cars, we don't get hit as hard because we are in more platforms.

At one time, we were in one platform on the car and that was aluminum knuckles and aluminum this and aluminum that. That is over. We are talking about gas injection here; it's very growth business. We take the turbocharging business, a growth business. I know it is old-fashioned, but you can't make enough turbocharged hoses these days. And we are trying to make them in three plants.

So let's keep investing, but instead of putting all our eggs in one part of the car, we are all over the car. And that is the strategy and I think before we really balloon in any other particular segment of the car that we are in or one product line that we are in today, we would get something else to put on the car.

So I want to thank everyone. I assume that John was the last on our queue list. I want to thank everyone, all the stakeholders that listened to this call, indirectly or directly. We are working very hard. We're going to finish the year again. All indications are that we will be up in revenue and up in sales and up in profitability.

And that is the key. And then 2016, I hope it is getting boring, but that is what the goal is to increase the revenue of the Company and increase the EBITDA and hopefully the valuation of our stock. I thank you all again for your support and we'll look forward to seeing you or talking to you in the spring. Have a nice day.

This concludes today's conference. Thank you for your participation and you may disconnect your lines at this time.