Park Ohio Holdings Corp (PKOH) 2015 Q4 法說會逐字稿

Good morning, and welcome to the ParkOhio fourth-quarter and year-end 2015 results conference call. (Operator Instructions) Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

Before we get started, I want to remind everybody that certain statements made 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 relative risks and uncertainties may be found in the earnings press release as well as the Company's 2015 10-K, which will be filed later today with the SEC.

Additionally, the Company may discuss as-adjusted earnings and EBITDA as defined. As-adjusted earnings and EBITDA as defined 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 attributable to ParkOhio common shareholders EBITDA as defined, please refer to Company's recent earnings release.

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

Good morning, ladies and gentlemen. Welcome to ParkOhio's 2015 report card review. I would like to turn over the call to Matthew Crawford, the President and COO of the Company. Matthew?

Thank you very much, and good morning. We are pleased with our results for 2015 and excited that we set several new Company records as of December 31. We set new records for annual revenues of $1.5 billion, net income of $48.1 million, EBITDA as defined of $136.5 million, adjusted EPS of $4.17 and GAAP EPS of $3.88. We attribute these annual records to strong performance of our supply technologies and assembly component segments as well as the late-2014 Autoform and Saet acquisitions, which were both accretive to our 2015 results.

First, I'll discuss our annual results followed by our fourth-quarter results. 2015 sales increased 6.2% to $1.467 billion from $1.378 billion in 2014. We experienced both top- and bottom-line growth in our supply technologies and assembly components businesses due to strong demand from heavy-duty truck, automotive, power sports and semiconductor end markets. But our engineered product segment continued to be affected by the continuing low demand from the oil and gas, tubular steel and military aerospace end markets.

Our gross profit margins for the full year were 16.1% versus 17% in 2014. The reduced margin percentage is a direct result of the sales mix in our engineered products segment and the reduced demand from oil and gas and steel-related products. As we have previously discussed, the historical gross profit margin in these end markets are higher than our average gross margins, particularly in the aftermarket products and services.

Full-year consolidated SG&A expenses were $135.1 million in 2015, compared to $136.6 million in the prior year. SG&A expense as a percent of net sales was 9.2% in 2015, compared to 9.9% in the prior year.

In the fourth quarter of 2015, we took a non-cash charge of $2.2 million related to a court judgment in the EBSCO case, which has been in litigation for several years. We expect to appeal the court's ruling in this case.

Interest expense increased $1.8 million in 2015, compared to the prior year, to an increase in average borrowings to fund our 2014 acquisitions, which appeared right at the end of 2014.

Our effective tax rate for 2015 was 30.4%, which was lower than our 2014 effective tax rate of 34.7%. The decrease in 2015 effective tax rate is a result of the recognition of certain foreign tax benefits. We anticipate we will continue to show an increase in foreign income in countries which have lower income tax rates than the US statutory income tax rates. And therefore, as our non-US revenues and related profitability continues to grow, we will see a lower effective tax rate.

As we have discussed on previous calls, the effect of foreign operations in 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 $30.9 million, and our 2015 budgeted net income year-to-date was unfavorably impacted by $2.4 million, or $0.19 per share, from the effect of currency changes since last year.

Now let's discuss the fourth quarter of 2015. Our US GAAP earnings in the fourth quarter of 2015 were $0.95 per share, compared to $0.86 per share in the prior year. Our as-adjusted earnings for the fourth quarter of 2015 were $1.15 per share, compared to $0.90 per share in the prior year.

EBITDA as defined was $32.1 million in the fourth quarter of 2015, compared to $31.7 million in the fourth quarter of 2014.

Net sales decreased 6.9% to $347.4 million in the fourth quarter, compared to $373 million in the prior year. The decrease is attributable to reduced demand in the oil and gas and steel industries, as well as decreased demand from certain end markets in our supply technology segment compared to the prior year, primarily in heavy-duty truck, power sports and construction equipment end markets.

Gross profit earned in the fourth quarter was $54.1 million, compared to $56.9 million in the prior year. The gross profit margin percentage was 15.6%, compared to 15.3%. The increase in our gross margin percentage was primarily due to the improved margins in supply technologies and in our general aluminum business and a continued focus on managing costs throughout the business.

SG&A costs increased in the fourth quarter of 2015 as a result of employee severance costs incurred. These are one-time costs and added back to arrive at our as-adjusted EPS.

Now we'll look at the segments. 2015 supply technologies revenue grew 3.5% to $579 million from $560 million in the prior year as demand from heavy-duty truck, power sports and semiconductor end markets were strong. During the fourth quarter, we began to see weaker demand from these markets as well as semiconductor and industrial capital equipments, which an effect on supply technologies' results in the fourth quarter as sales were down year over year $5.4 million.

For the full year, segment operating income increased to $50.3 million, an increase of $7.8 million over 2014 operating income of $42.5 million. Segment operating income margin for the year was 8.7%, a significant improvement over the prior year of 7.6%. The full year improvement was driven by improved operating leverage and strong execution in our facilities that service heavy-duty truck, power sports and auto-related customers.

Segment operating income margins were 7.5% during the fourth quarter of 2015, compared to 7% in the prior year.

Assembly components full-year net sales increased 16%, or $78.7 million, to $569 million compared to the prior year. We're pleased with this growth, which is related to our ongoing initiatives around auto fuel efficiency and increased global penetration of our key technologies. Most notably, our investment into direct injection products, our commitment to light weighting using aluminum to displace iron on safety-critical components, and our additional investments in both China and Mexico to support our fuel systems hose and molding capabilities is clearly paying off.

2015 segment operating income grew $15.9 million to $57.9 million, which was a 38% improvement year over year. Segment operating income margin was 10.2%, compared to 8.6% in the prior year. This improvement is a result of operational improvements and improved pricing on various products throughout this business segment.

Revenues in the fourth quarter of 2015 were $139.6 million, compared to $138.8 million, or essentially flat over the prior year. Our operating margins expanded to 11.5%, compared to 7.7% in the prior year.

Now let's move to engineered products. Full-year 2015 net sales decreased 3.9% to $316 million, compared to $329 million in the prior year. Our equipment business continued to be affected by historically low demand for new equipment and aftermarket products and services throughout the year.

Low demand from our oil and gas, tubular steel and military aerospace customers has been a challenge for the business throughout 2015, and we expect well into 2016. For the full year 2015, the effect of the industrywide slowdown in oil and gas, steel and military aerospace markets impacted our operating income by approximately $21.8 million. We continue to aggressively reduce costs, implement operational improvements and launch new customer initiatives as we manage through this extremely difficult environment within this particular segment of our business.

Engineered products were $73.8 million in the fourth quarter of 2015, compared to $94.8 million for the same period in 2014. Operating margins declined to 7% from 10.4% in the prior year as low volumes continued to affect our plants.

Next, let's highlight cash flows for 2015. Operating cash flows for the full year totaled $45 million. Net capital expenditures were $36.5 million. We invested a significant amount of capital and high-return internal projects for our assembly component segment, which will grow sales and enhance product margins in the future.

Overall, we are pleased with our performance in 2015. Despite the headwinds we face in our engineered products segment, the diversification of ParkOhio was evident as other businesses grew in sales and profitability, which included international expansion, introduction of new products, and continued investment in highly engineered and proprietary solutions.

At this time, we would like to provide you with a revised outlook for 2016. We are concerned that the economic malaise which intensified in the fourth quarter is continuing well into 2016. Continued weakness in engineered products key end markets will also continue to be a headwind.

On the positive side, generally strong automotive sales combined with cost-cutting initiatives and new business launches, mostly in the second half, are all signs of strength. With that in mind, we expect consolidated net income per share for 2016 to be in the range of $4.05 to $4.23 per share. We are forecasting capital spending for 2016 to total approximately $35 to $40 million, with the majority of the spending representing growth capital.

We expect 2016 depreciation and amortization to be approximately $28 million and are forecasting our effective tax rate to be 33%.

In closing, we're looking forward to another year of increased sales and earnings. While we recognize some headwinds that have been discussed above, we believe we are well-positioned to grow across the Company and once again achieve record results. Thank you very much.

Thank you, Matt. Great job. Well, 2015 was a very difficult year for most operating companies in the US. However, we are very pleased with our ability to continue our seven-year winning streak of posting increased revenues, increased EBITDA and increased earnings per share.

Now let's move into the future; really, the important stuff. For the first time in the Company's history, we did not complete an acquisition in 2015. Primarily due to the fact that we felt that the premium prices being fostered by private equity firms make it very difficult to acquire something with long-term value of a company that can grow at the same pace that the major company, the current company is, which has been wonderful.

But we did switch to the concept of investing in organic growth through capital equipment. And you're really going to see the beginnings of the payback of that in '17, '18 and '19. The investment in capital equipment around [diversified], a number of our units were selected where we could apply additional dollars within a particular silo to create additional revenue and, of course, earnings. This is going to have a dramatic effect in the Company starting in '17. There is a time slot there when you acquire a Company that exists there is immediate earnings in the balance sheet.

There is a long runway in setting up to do some of the exciting projects we have committed investments. But they will have a very, very wonderful impact, again, on the Company over the next five or six years.

We are committed to growth here at ParkOhio. We intend to -- and a goal primary to us is reaching that $2 billion in run rate as soon as possible. And we feel that we have the Company that can do that or go beyond that number because of our customers worldwide and diversification of the business and, more important, our customers that we are following around the world.

Okay. Let's open up the lines for any questions at this time.

(Operator Instructions) Christopher Van Horn, FBR.

Congrats on the quarter; great margins.

Thank you.

Just a couple of questions. Could you -- when you're talking about your -- it seems like CapEx is certainly ramping up compared to 2014. And do you think about CapEx spend as a percent of sales, or do you more look at it as the growth opportunities you see within the business?

And then kind of a secondary off of that, is the investment mix that you are seeing from an end-market perspective similar to what your revenues break out as in terms of what end markets you are addressing in your growth CapEx?

Well, as we've talked in the past, Chris, it was clear in 2014 that we were not going to be able to do any real acquisitions along the lines that we are committed to. And we have a long history of being very prudent buyers here at the Company. We've done some 86 acquisitions since we came in at 1992. And we will just not overpay for companies, particularly at the numbers, eight, nine multiples.

So, absent that opportunity, we caucused and put together and brought -- asked everyone in every silo to bring in their growth plans and where they would invest money within their organization. We went over the best plans, and we spent a couple of weeks looking at this. And one by one, we determined the ones that were long-term in nature.

For example, the 10-speed transmission starting up in the aluminum division, which is a contract that is a 10-year contract. But it's substantial CapEx. So we really aimed the CapEx at the growth potential within each silo, and we took the best opportunities.

And, yes, we are -- but think of it this way, the way we look at it. If we spent $25 million or $30 million or $35 million, it's like making an acquisition. But the difference is with organic growth, number one, you have to make the investment, order the equipment, get it up and running. And we're talking about forging lines and all types of very sophisticated equipment.

There's a long runway. It takes two years at a minimum from the day you receive the order until you start getting any revenue. But the margins are higher. The margins are higher than, quite frankly, you would in even good acquisitions.

So this is not a knee-jerk reaction. This is something as an alternative choice. If you're not going to -- if you won't pay nine times and you want to continue to grow organically, you have to look within your units.

And there's one thing we have with our customers. We have lots of customers around the world. There's lots of opportunities. We just -- it was like the pick of the litter. Whoever had the best idea with the best return, with the least amount of CapEx, that's where we decided to go. But that concept -- if from our viewpoint, I think it's kind of run its course. We're finished with that. Now we're looking for other ways to grow the Company, and maybe we will be back to transactions. Maybe a little shakeup and a little softness in the economy and everything else, down comes the multiples of EBITDA that these companies are willing to pay.

Let me hop in and just kind of remind you -- this is Matt speaking -- that roughly half the revenue of the business, that being of the industrial equipment group and supply technologies, does not require CapEx to grow the business.

The equipment business is largely built around intellectual property and selling know-how related to the equipment and the aftermarket related to the embedded equipment. Supply technology requires capital to grow, but it's on the working capital side.

So you might look at the overall Company and say, boy, $30 million on $1.5 billion isn't a lot. But that's part of the reason, we think, that $35 million is sort of a kind of number that is the right number for our business. And incorporate some of the best process improvement and growth capital ideas is because really only half the business is capital intensive.

So I don't know if that helps you understand a little bit how we think about it. But we do see significant opportunities in the other half of the business, most notably in our forge business, most notably in our fastener manufacturing unit and in our automotive segment.

Those are around some of the issues we've already discussed. Some of it is global expansion; taking our technologies into Mexico and China, most notably. As well as expanding capacity in fast-growing areas. So, I don't know if that helps.

It does. Great. Thank you so much. And then just the impressive margin performance in some of your segments, is there any way you could get a little more granular on where that's coming from? Is it mainly product mix? Is it better efficiencies on the operating line? Is it a combination of both? Any sort of walk-through of that would be great.

We touched on it a little bit in my comments, but maybe I can revisit it by saying supply technologies, I think, that we had solid volumes last year -- as a year, got softened in the fourth quarter undoubtedly. But throughout the year, we saw great utilization at most of our locations, particularly those related to auto and truck.

So, no, I think we also saw some nice products mix towards some proprietary products, which I think come with slightly higher margin. So we had excellent, excellent wider mix products and excellent utilization in that business during 2015.

I also talked a little bit about assembly components. Certainly that really is the autofocus part of our business. Good volumes. Slightly improved pricing in some areas that were underwater. So I just think we address that business, so we've been discussing almost every quarter. That's been a work in process for as long as I remember. And I think we just did a better job in 2015 on executing on the volume we've had.

Great. One more, if I may. Within auto, it's obviously been an area of strength and will likely be one going forward. And you guys have done a great job diversifying your customer base, generally speaking, as well as probably in auto.

But is there any program or customer in auto where you feel you've got little bit more exposure than the average in the Company? And then in that same vein, is there any opportunities for customers where you are may be underpenetrated that you see an opportunity going forward?

Well, Chris, I can answer that, and I will. But we look at it a little differently here. Yes, we have customers, and one is more important than the other, and that can happen. But, again, our concentration and our investment in the auto industry -- and we can go back. This really started in 2010 and 2011. We're looking at the 90 million cars in the world, not the 16 or 17 million in North America. And we've been very, very patient about deciding instead of selling just one item. Everything we sell to any of these auto companies would be aluminum.

As you know, we have been very careful to get ourselves in three positions. Not own the aluminum, the lightening of the cars, we've got ourselves in gas injection, which is a really a growth industry. We got ourselves in the host business, the turbocharged business, which is excellent, and a few filler systems. So we have 4 product lines that we are trying to sell on a long-term basis into that 90 million cars.

And the thing that we probably should give a little more light to is the fact that we are up in 2 of those products -- and hopefully soon, 3 in China, in Shanghai. And we're making products there with people like General Motors for their production cars. So this is not about an event in the car business where we're just going to sell more aluminum parts. We're going to sell more pieces in the car.

So if the car volume comes down even North America, we're going to have a bigger piece of the pie. But the exciting part here is about the international concepts. And we are really embedded deeply, particularly with General Motors, in the opportunity in China. All those Chinese car companies, they did well for a while but they are really falling behind. They're taking bigger and bigger market share is General Motors and soon-to-be Ford.

So these relationships we have, we can sell them more products. What's great about the turbocharged business and the gas injection and everything else, it is not as capital intense as the aluminum business, which requires tremendous investments to set up those lines. This is more technology.

Gas injection and how to do that is technology. It's not just brute force. So that's where we want to go; that's where we are. And five years ago people would say, well, why would you go deeper into the auto business? Well, we are deeper in the auto business at the right time. So maybe we thought it out. Maybe we got a little lucky. But we are there with lots of platforms across the board.

So one particular customer at any particular moment might be important, but not 90 million. It doesn't represent that. So we are excited about following this, following our customers in this business. And it looks like a hell of a runway for the next two or three years. Especially, if China comes back and India starts to light up, that's the next place we go.

Great. Thank you so much, and congrats again on the quarter.

Thank you.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

First question is on the guidance. You tightened the high end of the range but kept the low end. The question is how much confidence do you have this early in the year. Do you already have firm line of sight to $4? Or do you internally see a lower number that you're confident in, and you're depending on some positive swing factors as the year progresses?

Look, guidance is guidance. We put this out. And with everything we know today, okay -- we have continually done this over the years. We feel that although it's a spongy start -- I mean, there's no one that's manufacturing everything in North America that's not holding their breath what happened in January and February.

So I'm not saying that we're going to change that number. That's our goal. We intend to make that goal. And it might seem narrow to others, but $4.05 to $4.23. The one thing that -- our goal that we will accomplish is the revenues have to be up year over year and the earnings per share have to be up year over year.

So that just a view that we had a month ago or thereabouts. And we're here today, and we're going to have to work really, really, really hard. But that's okay. We are a Company that we got through it last year and the year before, and we're going to get through it this year.

But we are not going to subscribe to huge growth in this atmosphere. Maybe it's modest like someone's opinion, but that's the number and we're going to go after it. And we think we can make it. And that $4.05 to $4.23 is a nice range, and that's where we are.

Got it. So, 1Q is almost in the books. As you look at the cadence of earnings through the year, is 1Q definitely the low quarter and then it kind of ramps sequentially through the year? Is that how you're looking at it internally?

Well, it has been. Over the last three or four years, it's been the tendency. This is always something that's late. We finished strongly. And, no, I don't like the looks of the first quarter, but that still doesn't affect my judgment relative --. Anything that went beyond in the first quarter, we believe we can make up. Okay?

Got it.

Listen, it's not how you start these years; it's how you finish them.

Right. I agree. And obviously engineered products is the toughest spot for you right now, right? I guess the question is when you look at volume and mix in the first quarter, just to help us with modeling a little bit, do you expect that margin comes in below the 7.5% in 4Q? Or can you maintain that level plus or minus, and then maybe that grows as the year progresses?

Well, I think you kind of summarized it. That's kind of the plan. You've spoken for us. Of course, it's going to be a little bit down in the beginning, and it's going to be increased as we go along.

But look it -- we have as many upsides or more than we have downsides. The downsides are -- everyone knows the downside. Everyone knows the first quarter is going to be slow. Hopefully, will get us up in an election year, and maybe the taxes will come down. And if the taxes come down, the earnings are going to go up. I mean, there's a lot of magic to this.

And the bottom line is you're going to have to work with what you're working with. And the balanced portfolio of this Company, there is always something working. I mean, one order in the gas/oil business -- which we have zero in for gas and oil. I mean, zero. And nothing in for the military. We have nothing in for a lot of things.

So, it's very difficult. The idea of putting out guidance for the year is a difficult thing, particularly if you want to be correct. And we'd like very much to be correct and exceed this thing. And we'll have a great year, based on our numbers. But quarter by quarter, it could be ugly. But the net result is this is not quarter by quarter. This has the EPS guidance range revised; $4.05 to $4.22 for the year. That's what I'm on.

Got it. Can we talk about supply tech? On an organic basis, are, in aggregate, production schedules coming down? Or I guess just more simply, do you expect revenue there will be up or down in 2016?

Steve, this is Matt. As I mentioned in my comments, I do think that there was some weakening in the fourth quarter, which would not be described as seasonal. I think that that has continued into 2016.

So we are going to need to effectively -- and we anticipate effectively offsetting some of that weakness with new sales initiatives. Which you know we've been working hard on in the last couple of years.

I think that, no, as we sit here today, growth rates are softer than they were this time last year, virtually across the board.

I was going to say it's a good point. Does this tougher environment cause anyone to accelerate the adoption of supply tech services to help take cost out of their own business?

You know, that's a great question. I -- certainly anecdotally, there is some of that. We are always engaged, and more especially at this moment, in a number of high-level conversations and opportunities.

Anecdotally, there certainly is some of that pressure on organizations to reduce costs, which accelerates these kind of conversations. I don't know that I'd make it as a general comment. But sort of anecdotally you are seeing customers who are a bit shellshocked a little bit at how things softened in the fourth quarter, and they are looking to combat it.

Steve, again, it's interesting, as I talked with people about 2016, 2015 was a tough year; a lot of unknowns. And 2016 isn't much better. Okay? But what we have to really concentrate on is just meeting the goals we need to sustain our momentum here.

But we have so many fantastic opportunities that everything is -- I can't tell you, I've never been more excited about the things -- that good things can happen if the damn sun would come out. If we could settle this political thing to get this thing going again in America, we are going to be -- we're going to do very, very well.

So while there are unknowns out there, which there is, our job over here is to run the Company and, as modest as it may be, increase the revenue, increase the earnings per share in 2016. Okay? And then the rest of it will take care of itself. Don't think for a second that these numbers or this guidance is not reflective of the Company. We have not lost sight of the $2 billion number. We haven't lost sight of a lot bigger numbers.

And the business is there; the customers are there. We just have -- you know, you can't win the game if you don't stay in it. And right now, we're playing very conservative, as we should be. But that doesn't mean there's no indication of where we are going in the Company. I can tell you that.

We are not anything but optimistic over here. We are just being stewards of a tough environment. You've got to do what you've got to do to stay in the game and get ready for the future. It's going to be a bright future in this Company. Why? Because we got all the right customers around the world.

Understood. One more and I'll get back in line. So you're guiding net income up a little bit for 2016. How do you think about working capital this year? Is it a source or a use, and how much does it swing, if you have any kind of comment on that?

Steve, this is Pat Fogarty. As you know, our working capital ranges from about 23% to 24% of sales. So as our sales grow, we're going to have some additional investment in working capital. And we expect that during 2016. I would say that the increase that we're going to see is less than what we had in 2015. But we do expect to increase our working capital for the year.

Steve, this is Matt. I want to jump in there and say to some extent we hope we do because that would be evidence of some success on the new product launch -- or the new customer launches of supply technologies, as well as other parts of the business.

As you know, that particular part of the business, supply technology, is little bit more working capital intensive. So if our mix shifts a little bit to our success and those new customers, then you might see a little usage. And that's a really good thing.

Got it. Thanks for the time, gentlemen.

Thank you very much.

Thank you. We Have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, I'd like to thank all the stakeholders and investors in the Company, the key employees. We're excited about the future here. And I just indicated, we'll be a little bit careful here. There should be no indication of any lack of ambition or future for the Company.

We want to thank you for attending the call and look forward to visiting with you in the near future. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.