Park Ohio Holdings Corp (PKOH) 2017 Q4 法說會逐字稿

Good morning, and welcome to the ParkOhio Fourth Quarter and Full Year 2017 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 everyone 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 relevant risks and uncertainties may be found in the earnings press release as well as in the company's 2016 10-K, which was filed on March 9, 2017, 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 to EBITDA as defined, please refer to the company's recent earnings release.

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

Well, thank you. Good morning, ladies and gentlemen. Welcome to ParkOhio's conference call. I'd like now to introduce Matthew Crawford, the President and COO of ParkOhio. Matt?

Good morning, and thank you very much. Overall, 2017 was a good year for ParkOhio. Our operating performance improved year-over-year. We met our internal operating plan, so we completed several actions to position the company for long-term success. As you hear more a little later, we're excited for 2018, and expect significant growth and revenue, operating income and EBITDA. Specific achievements during 2017 include: we achieved sales of $1.4 billion representing a year-over-year growth rate of 11%; we grew adjusted earnings by 7% and EBITDA by 15%; we continued our track record of strong operating cash flows, delivering $47 million; we refinanced our senior notes and revolving credit facility, creating expanded capacity in more favorable terms. At December 31, we had almost $200 million of unused borrowing availability and over $80 million of cash on hand; we continued making strategic acquisitions during 2017 to complement our existing businesses with expanded product offerings, markets and customers; we invested nearly $30 million in capital, much of which is focused on business expansion; and already this year, we completed a strategic acquisition of Canton Drop Forge; and yesterday, we announced 2018 earnings per share guidance that represents a 10% to 16% adjusted earnings growth over 2017.

Turning back to our 2017 full year results. Again, net sales were just over $1.4 billion, an increase of 11% compared to a year ago. This increase was driven by a combination of organic growth, which was 5% and acquisitions, which contributed 6%. Gross margin as a percent of sales increased by 70 basis points from 15.9% in 2016 to 16.6% in 2017. The increase was due to the increase of sales volumes and operational improvement initiatives implemented throughout the year. SG&A expenses increased year-over-year due to SG&A associated with the acquired businesses. However, as a percent of sales, SG&A was relatively consistent at just over 10%.

Income tax expense in 2017 was negatively impacted by the expense of $4.2 million related to U.S. tax reform. Excluding this impact, the full year effective tax rate would've been 29.2%. Net income per share for 2017 was $2.30 per diluted share or $3.23 per diluted share on an adjusted basis. These amounts compared to earnings of $2.58 per share in 2016 or $3.01 on an adjusted basis.

On adjusted basis, EPS in 2017 was 7% higher. EBITDA for the full year was $131 million, up 15% compared to $114 million a year ago.

Looking at fourth quarter results specifically. The sales were $366 million, up 19% compared to 2016 due primarily to a combination of organic growth, which was 9% and acquisitions, which contributed 10%. Gross margin as a percent of sales increased 160 basis points from 15% in 2016 to 16.8% in 2017. Change was due to the increase of sales volumes and improved operating cost absorption in many of our facilities.

SG&A expense for the quarter is approximately 10%, which was equal to the prior year. Interest expense was higher in 2017's fourth quarter. While average borrowing rate was fairly consistent year-over-year, the increase was driven by higher average outstanding borrowings caused by the refinancing of our senior notes and debt related to the GH acquisition principally. Income tax expense in the fourth quarter was negatively impacted by a onetime net tax expense of $4.2 million related to U.S. tax reform. We recorded a transition tax expense of $14.2 million, which was partially offset by an income tax benefit of $10 million to adjust our net U.S. deferred tax liability from 35% to the new corporate tax rate of 21%. Excluding the impact of onetime tax reform expense, the effective rate in the fourth quarter would have been 31% compared to 32% in 2016.

Net income per share for this quarter was 46% per diluted share or $0.86 per diluted share on an adjusted basis. These amounts compared to earnings of $0.53 in the fourth quarter of 2016, or $0.66 on an adjusted basis. On an adjusted basis, EPS was 30% higher than in the fourth quarter of 2016. And EBITDA was $34 million, up 28% compared to $26 million a year ago.

Now away from the numbers, let's look at the segments. In Supply Technologies, sales were up $60 million or 12%, reflecting organic growth of 8% as well as $19 million in sales from 2 acquisitions. The organic growth was driven by higher customer demand and new sales in several of the segments key end markets, including power sports and recreational vehicle, up 16% year-over-year; heavy-duty truck up 5% year-over-year; the semiconductor market, up 37% year-over-year; and aerospace, up 25% year-over-year. We are particularly pleased by the success in the newly formed aerospace group as they take a big step towards the $100 million sales goal over the next couple of years. Also in this segment, our fastener manufacturing business, again, performed very well with a year-over-year sales growth of 8%. The business continues to benefit from global initiatives in metals related to light weighting and our team's efforts to globalize and find new applications for our products. Operating income in this segment increased to $46 million from $40 million in the prior year, an increase of 15%. In addition, operating income margins for 2017 were 20 basis points higher than a year ago. Both improvements were related to increased volumes as well as new business, which have higher margin attributes.

In our Assembly Component segment, sales and operating income in 2017 were relatively flat compared to a year ago. Continued increasing demand for our fuel filler pipe and fuel rail products were offset by lower sales in our extruded rubber and plastic product lines as well aluminum products. Although importantly, these reductions were related to the end of life of certain programs and not lost business. In fact, we're very excited about these products and as we have mentioned on previous calls, are making significant investments in 3 plants located in China and Mexico to support plant growth. We are forecasting a significant ramp-up in sales in these investments starting in 2019, which should exceed $150 million in run rate shortly thereafter. More broadly, our strategy embraces 2 concepts: first, global emissions regulation will continue to benefit our product lines, which are focused on meeting these increasing mandates, including, LEV III, Euro 6 and China 6 regulations. These include light-weighting cooling applications and direct injection, among others in our product portfolio. Second, well, some of our products focused on the internal combustion engine, we're very excited about the global adaption towards electric vehicles, which, for the foreseeable future, is heavily weighted to hybrid designs.

Turning now to our Engineered Products segment. Sales in 2017 were up 33% compared to a year ago. The growth in the segment was driven by increased customer demand for our induction heating, particularly in heat treat and pipe threading products. This was a welcome improvement from the recent years of weakness in global demand. Also as we enter 2018, we continue to see stabilization in core commodities like steel and oil, which will benefit these backlogs. Operating income in the segment was up 95% year-over-year from $10.6 million in 2016 to $20.7 million in 2017. Operating income margin increased by 200 basis points. The increased profitability was driven by the higher sales in 2017 as well as the benefit of significant cost reduction actions taken in late 2016 in response to lower demand levels. At December 31, 2017, backlog in this segment was $173 million, in compared to $138 million a year ago. The increase suggest continued sales growth in this business as discussed above. Also, on February 1, 2018, we completed the acquisition of Canton Drop Forge, the business, which has been serving customers for over 115 years, is complementary to our existing forging business in the Chicago area, Kropp Forge, and will enhance our presence in the global aerospace as well as other key industrial markets.

Looking ahead now to our outlook for 2018, we are forecasting continued revenue growth, both organically and via revenues from the recent acquisitions. The most significant areas of organic growth are expected to be in the aerospace markets of Supply Technologies, the fuel products business in Assembly Components and the industrial equipment business in Engineered Products as certain end markets continue to rebound. We expect 2018 earnings per diluted share to be in the range of $3.55 to $3.75. This range reflects growth compared to 2017 of adjusted EPS of 10% to 16%. We're also forecasting operating cash flows to be $50 million to $60 million and capital spending to be approximately $30 million to $40 million. We expect our effective income tax rate to be in the range of 30% to 33%, as the benefit of lower U.S. corporate tax rate is offset by increased income tax expense from other provisions of the new law, such as interest deduction limitations.

In conclusion, we believe ParkOhio is poised for success in 2018 and well positioned to reach our stated sales goal of $2 billion. Thank you very much.

Well, thank you, Matthew. Before we get into answering questions, I'd like to point out that in the press release, I used the quote that " ParkOhio has a great future behind it." I got a couple of questions of what exactly that means. What it means is what we've been doing for the last 25 years to get ready for this opportunity, which exists today. I do not think the company has ever been in a position to take advantage of hard work around the globe, setting the table for the future. As I take a moment and share some of our thoughts relative to the future, the current management thoughts, particularly in the next 4 years. As I said, the table is set. There are wonderful opportunities. We have our bank financing, we've got the balance sheet in the right position, we've added some key players to the team, and we do have what I call the N4 plan in the next 4 years. If you go back to Matthew's comments, in 2017, the sales were up, obviously, and -- by 11%. In the last 8 years, revenues averaged going up 8.8%. That's a nice number. And again, we believe the next 4 years, we're going to average 10% or more growth in sales. And I'll give you some highlights on how we expect to do that. This is not something that is climbing the sky, it's reality, and I'll share that with you in a moment.

Reaching a run rate, as Matthew indicated, $2 billion is a solid goal in our mind. The run rate, $2 billion, 2021 sometime, and accompanying that will be a 10% EBITDA. You can do the math for yourself. What's particularly interesting to me is we've taken this company in the last 25 years from $60 million of sales to this $2 billion goal, which we will accomplish, and we've been able to do this without issuing stock. It's all about cash flow. This is a great operating company, good times, bad times. So given the opportunity and given the availability of opportunities around the world, we're in a very, very great position. Incidentally, if it goes too well, we're going to grow that quickly, what about the debt? Well, let's just start by the fact we've averaged in the last 8 years $55 million of operating cash flow per year, and that's somewhere, I think, around the 45% of EBITDA. If you take a 10% and you talk about the growth, and you talk about 10% EBITDA, that's the numbers. And we can accomplish this. We're all around this. We've been up to 10%. 11% is a good number for us, but we can do 10% and continue to grow the company and not get swamped in debt, staying well below the 4 points.

Let's go back in why this is possible, try to -- well, this company is operating in 4 big, big, big, parts of the world. In other words, North America, we're crossing over into 40% of sales outside North America, okay? We're growing in the eurozone, we're growing in Mexico, we're growing in Asia, we have 7 plants in China now. And into my knowledge, not $1 of the profits of the products that we made in China in now some 12 years, 11, 12 years, have ever been shipped out of China. We're in a Chinese business with the Chinese customers. Whatever we're doing over there with cheap labor and running around the world, we were over there building relationships. So this is a good place to be for us, and they like us there. And maybe there's a carryover the fact that we were not in there looking like that we were using their cheap labor. It doesn't sound like much, but when you're building a business that we have an opportunity in China on numerous platforms, it's a good feeling.

Now I want to break down the growth opportunities into 3 categories, which I call: number one, all organic. I believe, there's over $200 million in old organic. What I mean by that is some of the industries that we serve like off-road, like Caterpillar, the steel industry, aerospace, gas, oil, trucking, Polaris recreational vehicles. They all have -- not had a great 2-year, 3-year period. But they're all on the way back now. That business, we have never lost a customer of any size here. They're still in business. They've had some rough years but we're there, they are there and are on the rebound. And that's a couple hundred million dollars coming right at us. So when you start adding up the numbers and say, well, we get to $2 billion, I've got to grow $600 million, $700 million where is that coming from? Well, a good piece of it is coming right from our historical relationship, what I call, old organic. Now we have new organic. This is the business expansion of current units we have. Supply Technologies is red-hot right now, it's a great company, logistics spreading around the world, it's here, it's timely, it's going to get better and bigger. China has been exceptional in our relationship in the auto truck at every aspect of China. And aerospace is something that we're very interested in. I've mentioned this at the last conference, we're followed up with aerospace-centric opportunities and more to come. We like that field, we like the fact that the [lease] engine is coming aboard. We like the idea that the military's back. That means landing gears, that means forgings, and this Canton Forge is one of the most outstanding acquisition. When you have a company that's been in the business for 215 years, and we have a company that's been in the business -- excuse me, rather it's 115 years, that's a little exaggeration, 115 years, and Kropp Forge, the one we've owned for, like, 90 years, they've been dead head-to-head competitors for 75, 80 years. Well, we've joined forces now and it gives us a great opportunity for the future in an area where there is aerospace diversification, gas and oil. I love this acquisition.

In closing, I think the company -- we've been able to do this without issuing stock. We've been able to do this old-fashioned way, which is cash flow. We've been able to do this without trying to hit a home run in the world series by buying an amusement park. We've done this by acquisitions, $50 million at a time, $75 million at time, integrated in our management system and team. The platform is there. It has worked. It's worldwide. And I'm looking forward to the next 4 years.

Now I'll be glad to turn it over to questions.

(Operator Instructions) Our first question today comes from the line of Christopher Van Horn with B. Riley FBR.

This is Dan Drawbaugh on the line for Chris. And congratulations on the Canton Drop Forge acquisition. Just to start on Engineered Products segment, coming off that acquisition. Looking ahead, you've made 2 acquisitions there, fairly recently: GH, and now, Canton. I'm curious to know what you think -- and you've also got sales ramping pretty quickly. So I'm curious to know what you're thinking about the margin profile for their medium term. I think this used to be mid-teens margin business, you ramped it something like 200 basis points year-to-year in 2017. What should we be thinking about in terms of that margin profile going forward?

Dan, this is Matt. So I think that the both acquisitions are accretive to the current margin profile of that segment. So just to remind you, there's 2 different businesses in that segment. One is the Forge business, where Canton now participates. Canton will be accretive to the Forge group profile. In general, that business still struggles with some weak demand in a few areas. We have begun to see a return, for example, in the freight car space. We have seen a little bit of pick up but not much in the locomotive build space. So Canton, I think, has a nice diverse set of customers, while they are well-below peak revenue numbers in their own history or even their own recent history, they bring a nice diverse portfolio, including our commercial aerospace to the company at an accretive margin. But in general, those businesses are still operating at undercapacity or underutilization from what we're accustomed to. The other part of the business you mentioned is where we added GH. The induction heating business affected largely by the global steel markets, which has been a bit of a hot topic lately, as well as oil and gas have seen some soft demand numbers recently. So GH was part of our initiative to continue to augment the heat treat side of the business. And heat treat, I think, the hardening side of the business, if you will, has been a great investment for us because it has been exposed to things like automotive and aerospace and other production environments that have been more robust. So they participate in GH and part of the company that, once again, has been struggling a little bit with soft global demand, some of those core commodities, and they've brought a nice diverse exposure on the hardening side, and candidly, have brought a book of business and the management team that also will execute at a level which is accretive to the historical margins. So I think my point is, and specific answer to your question is, we've sort of buffeted those businesses with some good additions. But we'd still like to see additional demand flow through the operating leverage in our Engineered Products group as the highest potential of all ParkOhio. So an incremental $10 million or $20 million of business there, that does a lot of good for us.

Okay. I appreciate the color. That's very helpful. And then you mentioned, just in your prepared remarks, $100 million sales goal for aerospace. I'm not sure if I missed this, but can you clarify for us what that compares to right now?

We started this initiative a little over a year ago, and just a backup for those that are -- don't recall or weren't on the call at the time. We identified aerospace for Supply Technologies as a end market that we felt we should enter. We like some of the margin profile characteristics and we like some of the growth opportunity there. Supply Technologies has traditionally cut its teeth on what we feel is the toughest part of the industrial market, right? Which is trucks and snowmobiles and things -- semiconductor tools and things like that. That initiative, we knew, was going to be organic, but also, we would do some small acquisition as well. We've done a couple. So we're really pleased today to suggest that we are well on our way to meeting that $100 million goal, which we announced about a 1.5 years ago. We did not disclose how far along but I think I'm comfortable in saying, we're at least halfway.

Our next question comes from the line of Edward Marshall of Sidoti & Company.

So I want to kind of talk about the SG&A, talk about maybe, I mean, I know there was an initiative to streamline the organization and over the course, we saw that. But as I look out on to guidance for 2018, and I kind of think about where we were in 2017, I would've thought with the volume growth that you've seen on the top line would've seen a better operating leverage as we move through the model. I'm just kind of curious about your thoughts, maybe what added to the business and maybe what changed relative to kind of that streamlining the organization, following the issues with the Dodge and Chrysler?

Yes, I'll jump in on that, and then Pat can clean it up at a more granular level. But let me just comment again briefly on the fact that we do have some businesses that are suffering from underutilization, where we are continuing to support global networks aftermarket services, and equipment builds, particularly as it relates to Engineered Products. And forging facilities, high fixed cost facilities, not just in that group, but across the business were waiting to return. These are really high margin profile businesses that are not operating optimally. So we are committed to being long-term investors here, and we've discussed on prior calls, the importance of keeping and retaining and building key management teams to build this business into the future. So I continue to think that we're not in an optimal profitability environment, number one. Number two, we're executing on a growth plan across the business. I mean, we talked a lot about our new plants in Mexico and China. Those plants don't build themselves. These are expensive projects. They have some CapEx associated with them and they also have significant expense before you get $1 of revenue. It's great to do an acquisition, plug and play, you get the pro forma the results and you're off and running. Building plant is not cheap and it's not easy. So we are executing against a significant growth strategy in our Assembly Components group and that's going to cost some money. So against that backdrop, I would tell you that I think the operating level associated with the high single-digit growth rate and almost double that on the profit line isn't all bad. So I'm willing to defend that particularly against the backdrop of those 2 items -- Pat, I mean, sorry.

Yes, the only thing that I would add to Matt's comments, that is that the increase in the SG&A levels that we're expecting are primarily a result of the acquisition SG&A, which operate at a slightly higher percentage to sales than our historic levels. And also there is increases in amortization associated, not only with the acquisition and the amortization of the intangible assets that we value, but also in certain employee-based share compensation amortization that we expect in 2018.

Let me answer that a little -- You're correct, we've taken the brakes off cost reductions, restructuring, 6 months ago. We'd anticipated this run that we're looking at right now and we're looking at in the next 4 years, and we did our share and more in reducing cost, so forth, that's the way we operate the company. But this is different now. We've got to be prepared for the future. It's going to cost us some money to get prepared for the future. It's going to cost us some money to get new engineers in here to handle some of these new products. So we are fully aware of the fact that if you look at from your viewpoint, you're correct. Yes, the brakes have been off for 6 months, we're building the team to be a $2 billion company.

Got it. So if I can sum up what I think I'm hearing is, the investments today that ultimately get you to that 10% EBITDA margin on the $2 billion volume growth over time, and you're not seeing it because we're early on in the investment period, is that kind of what you're saying?

Yes.

We are saying that Ed. But I want to reiterate what I said, operating leverage, that's twice the rate of growth is I think -- I think we need to recognize, that's not bad as we are accomplishing the other things as well.

Got it. In the 2018 outlook, I'm curious about both organic growth that's embedded in the sales outlook, and I missed if you mentioned the interest guidance for '18?

I'll let Pat take the interest guidance, but I'll comment, this is Matt, on the growth. I thought it was interesting. We sort of suggested that long-term our growth has been split relatively equally. I think it was notable in my prepared comments that we talked about the fact that it almost was exactly even in '17 and even in the fourth quarter of '17. So I don't think there's anything that would suggest that, that long-term average is going to change in '18.

So somewhere 4% to 5% organic growth and the rest coming from the acquisitions that, either remains in -- at late in '17 and early '18? Okay.

Ed, this is Pat again. I agree with that. And also, to address your interest question. Keep in mind that a large portion of our debt is bond interest at a fixed rate, so the increase we're seeing in interest expense is a result of the cost of acquisitions and we see our effective borrowing rate because our debt at that level is lower than our bond debt. We see it lower. But overall, the increases in interest expense are going to approximate $1.5 million to $2 million and that assumes some rate increases that the Fed most likely will pass through this year. But we do expect to see our effective borrowing rate decrease year-over-year.

Got it. And then final one for me, I just wanted to talk about, I think, you kind of came close to it before but -- with the steel comments, but tariffs, your initial thoughts on any actions and with the limited details we have today, is it positive or negative for ParkOhio? And then I guess, as it relates to Engineered Components, how do you see it kind of flow through that?

Well, as far as steel and aluminum, it impacts us, again, I'm not as concerned about the aluminum aspect of it because in most of our contexts, we have the pass-through, and that's indexed on Platts, which is published daily in the New York metal markets and so forth. So that is -- we have yet to hear, in the sense when you're in Supply Technologies there a lot of fasteners, a lot of plastic fasteners that means there's a lot of steel, for the reasons I will -- is where that is going to be burdened? But in all the cases, we have the ability to go to our customers, particularly bigger ones, and get an adjustment in the price. But there is a long way from being resolved, obviously, if you spend any time watching TV or anything, I wasn't it watching recently. There's not -- no real answer to this yet. This is a game in we're going to plan to just keep doing what we're doing here and it'll affect us. But it's not a big scare from my viewpoint. We'll make it up in other ways in either both categories.

Our next question is from the line of Steve Barger with KeyBanc Capital Markets.

This is actually Ken Newman on for Steve. I did want to talk a little bit about what you're seeing in the M&A market from a deal perspective, where are you seeing the interest and curious if you are -- as you are looking at these deals that are coming on to your desk, are you more inclined to look out to build out Supply Tech or Engineered, and where are you seeing the better multiples?

Well, number one, I think there's been a settling -- general settling in the multiples that private equity are willing to pay. I mean, a year ago, there was -- you were scared with the 9% to 9.5% in cash flow. There was -- but right now, there's not quite the enthusiasm. Maybe they've run out of places. Private equities to be 3 years or 4 years and flip. It's flip the strategics, so there's no strategics surround, so it's 1 flip into the other. So it's -- this coming down. But our particular, we are moving into a niche. I know it doesn't sound like much, but $50 million, $60 million, $70 million, $100 million is a -- deal is in our core spot, especially if it's a bolt-on. So -- but I think we're getting some relief. We've done better in the last 2 acquisitions than we ever would've expected. It's a terrific -- we paid a fair price, but a lot of good things are happening in that area, but the deal flow is robust, and there are a lot of broken deals out there with private equity, whether you took them right to the altar once or twice in the last 18 months, and they're not going to transaction. So they've come popping back at us, and we're known for being smart and quick and fair, so -- and we have the ability to close, so I'm excited about it. But there's never -- I'll point out, there's never a thought here at ParkOhio that we prefer acquisitions or we prefer bolt-ons and we expect organic growth to be -- we just go where the best opportunity is for the company. So there's no set way of where we're going to grow. We're going to do the $700 million. It's not set in stone, or it'll be 50-50. It's set in stone, it's the best transaction, every single one. But the flow is great, it's solid. It's at least 0.1, 1.5 below what it was a year, 1.5 years ago. We were just sitting here with all that money. We've now got that $350 million to do something and what we do? 0. So unfortunately, why? Because we, as you know, have large shareholders in the company. Hopefully, that answers your question.

That's great color. So I guess, as a follow-up to that, I mean, as we think about the acquisition revenue that's built into your guidance. Can you help us think about where historical revenue has been for Canton Drop Forge as we look at our models for Engineered? And I guess, where -- is it correct to assume that there is no other additional deals that are built into the guide?

Ken, this is Pat. There is no additional deals built into the guidance. Our guidance reflects the acquisitions that we've previously made including the Canton Drop Forge deal.

Got it. Okay. And then you talk a little bit about it in your N4 plan. But I mean, if the upcycle kind of runs the way it has for 1 year or 2, how are you thinking about the growth rate that we can expect out of these businesses, especially as they're coming off of cyclical lows here?

This is Matt. I have -- I think might have mentioned a few moments ago about the long-term average of being just under 10%, and that goes back to 1992. I think in this environment, maybe we can do a little better than that. We're projecting something right about the long-term average this year. I think that in a robust environment, we'll do a little better and in a weak environment we'll do worse, but I don't think that's -- I think the long-term average is pretty indicative as a midpoint of how the company operates.

And think of it -- I thought about this way yesterday, 10% of the company doing $500 million is a little different than a 10% of a company doing $1.6 billion. It's a big number. We're talking numbers in $1.65 billion and $1.70 billion, and it's high to get to that goal that end for, you're talking real numbers here. So it's not as quite as easy. 10% of a bigger number is a bigger number. And if you want to maintain a 10% EBITDA, and you want to maintain a cash flow and if you want to keep your -- it's not that easy. We'll just -- we've got it done in the past, we've been all over that 10% in growth and EBITDA. This is not a big deal. We just have to execute. We've got the team and we've got the people and we've got the capital and we've got the customers.

That's good to hear. One last one for me. You talked about some solid growth in your backlog in Engineered. Can you just talk about the order inquiry in that business and how is that backlog starting to fill out as we are almost through the first quarter of this year?

Yes, this is Matt. I'm looking back for my notes, I think I gave -- as of December 31, 2017, backlog in the segment was $173 million compared to $138 million a year ago. So I think that's as precise as I want to get. But for what it's worth, I would mention that the early part of this year has been consistent in terms of the strength we began to see in the latter part of last year.

Our next question is from the line of Matthew Paige with Gabelli & Company.

You've mentioned some new markets like aerospace. Are there any new products you had to invest in to get into that market? And maybe also the inverse, have you taken a look through the portfolio and found anything that you don't feel belongs in the future of ParkOhio?

That's a good question. I -- the aerospace investment, we've traditionally had some exposure at the aerospace investment, particularly in the Engineered Components group. So a business like Canton, which is a forging business, we've had exposure to that. As I mentioned in my comments, we have sort of a sister company to that in Chicago in Kropp Forge. So I would not say that there's a significant different manufacturing process. I think it brings more forging applications in aerospace to our portfolio. I would say that on the Supply Tech side, it's an excellent questioning, yes, we are introducing products which are new to our portfolio. Having said that, our core competency there is supply chain management. So we are less in that business about designing and developing innovative products than we are about managing and improving the efficiencies of our customers and their supply chain. So I would say to you as we look generally in the forging business, we are adding new customers and new products in the business we know. And then in supply chain, I think, we're just tweaking our already pretty solid and deep expertise in supply chain management to slightly different products.

Got it. That's really helpful color. And then the second question for me is you mentioned some limits on interest deductibility from a tax perspective. Does this limit your ability to do future acquisitions until you can pay down some debt? Or how do you think about that?

No, Matt, I don't view it that way at all. I think the tax reform really penalizes companies with U.S. debt. And as we look at our business in the past, we've grown all over the world and financed that growth with U.S. debt. Really, what this will require us to do is to look at areas in the world where we can finance that growth in those particular jurisdictions, and not use U.S. debt to finance that growth. And we've been down that path and we continue to work towards that. As you may recall, when we bought GH, we financed that with European debt. We're going to have to continue to do that. And the markets will allow us to do that. So this just throws a, what I'd say, a short-term wrinkle into our effective tax rate but we're working hard to bring that back in the line with where we would expect it to be in the high 20% type range.

Our next question is from the line of Marco Rodriguez with Stonegate capital.

Just a few follow-ups. In regard to the drag you guys have seen this last year or so on the undercapacity you've experienced, is there any way you can maybe help quantify or help us better understand what sort of a drag that was in '17?

Marco, this is Matt. I mean, I think we've experienced that largely in our Engineered Products segment, so you're certainly welcome to go look back at our segment reporting over the last 7 or 8 years and see some of the volatility, some of the peak numbers in that segment were operating fundamentally in the same business as we were, perhaps actually a little better with the addition of some of the acquisitions. But that might give you a sense for what the gap could look like. So that may be one way to identify it. Having said that, as it relates to some of the undercapacity, some of the expenses relative to some of the expansion, whether it be in Supply Technology or some of the components, those are significant numbers but not ones that we would sort of readily identify. As they are, we expect them to be relatively short term, meaning the next 18 months or so.

Backing Matthew's comment up, the -- I'm going to try to figure out exactly what do you mean by drag. But Engineered Products, we've made it clear that this is -- it's just down in volume and this is a company historically was a 15% EBIT-type -- EBITDA-type company. It came down 9% or 10% during this whole period because of parts and service. So it was a drag on 1 aspect of it, and it's the sugar on the cake when you're having your parts and service around the world going great, and you're not selling capital equipment. So that drag is being lifted by the increased activity that we see coming in capital equipment, where all our units particularly in the eurozone.

Okay, that's helpful. So the Assembly Component side then, did you feel all that capacity that you had there when the client ended the life on 2 particular products, is that how we should think through that as we're exiting '17 and into '18, '19?

No, that's not the correct conclusion. I'll try to answer it this way. That of all the capacity we had and the ramp-down over a 3-year period of capital equipment going to the steel industry around the world and gas and oil are other areas. We haven't even really started to touch that. So we've re-engaged, do we have capacity that, let's say, is 25% of the availability, still we're waiting to fill without CapEx. Does that answer your question?

Yes, that's helpful. Then when we think about your longer-term guidance here, the 8% to 10%, or the 10% goal to hit the $2 billion, maybe if you can also talk in regard to your current guidance on '18, maybe if you kind of rank the top 3 opportunities you see in terms of easiest to slightly more not as easy, I guess?

Well, let's put this way. We talked about different categories, different parts -- let's call it parts of the world. Obviously, we expect a lot of good things to happen in Asia, and it happened in Mexico and the eurozone, and I think North America will be quite aspired but that could change in the next 30 days. It's hard to answer that question as we sit here today. Everything looks like it's on an upturn. We'll have some disappointments, obviously, you'll have disappointments from quarter-to-quarter and month-to-month. But in reality, I'd like you to just -- what we're saying as an operating company, not a private equity company that we can share the ship through 4 years at a 10% growth rate with a 10% EBITDA. And that shouldn't be that difficult for us. We've been doing it for years. So I don't want to pick out one area that I think is going to outperform the others. I think it's all of it.

And I might add one thing, if you don't mind. I think that maybe a little bit different this year than in the past, we are expecting support and growth in all of our key business units. I think that what we've seen over the last couple of years is a decidedly more favorable automotive environment, which is our single largest end market, and we've benefited from that, while others has sort of lag to touch. I think that -- while I agree, we wouldn't want to highlight any particular business, I think that we're seeing a nice broad-based resurgence across the business, and I think that while that may be mitigated a touch by a slight fall off in the sales for automotive in the NAFTA region, I think we feel very comfortable about the investments we've made globally into the auto market. So -- and also in key technologies, I discussed that address the hybrid market and the regulatory environment in multiple areas of the world. So we're pretty comfortable, this is broad-based at this point, which is nice.

Very helpful. And last quick question, if I might. When just kind of looking at the overall major risk for you guys, I mean, where, if you can kind of rank top 2 that you might be thinking about where you'll spend most of your time focusing on to make sure those risks are mitigated into '18?

I would jump in and just say that we are starting to see some more favorable demand, as we've mentioned, in the Engineered Products group, which does have the highest operating leverage. We have risks associated to execution on that business. As we just mentioned, we've benefited in our earnings in '17 from significant cost reduction in '16. We got to ramp up again. We got to get prepared to take the work that we are now getting and doing it at the expected margins. Much more difficult, much harder to do than to say it. I also would -- any type of -- not to lay it at the feet of the president, but any geopolitical issue relative to anything, but in particular, we like a little bit of inflation. A little bit of inflation is good for manufacturers. It's good for end markets. You don't want someone to be able to undercut you because we're in a deflationary environment and wake up every day worried about next competitor. But certainly, significant disruption in the marketplace relative to raw material pricing would be a challenge. Even though I think we've got indexes and we're in a great position with our customers, it would be disruptive.

At this time, I will turn the floor back to management for closing remarks.

Well, I want to thank everyone at the company, particularly all of our employees and I'm surprised and excited about some fans are seeing the print out of all the employees that work for our company, including hourly employees that showed interest in how we're doing. Maybe just -- maybe to hear Matthew chat or whatever. But generally speaking and let me leave at this note, kind of -- if you kind of dig higher, and it's really important to find out what the downside is and where the downside in the plan is we've outlined, I urge you as I'm not overly optimistic to look at the upside of the company, and what the potential is or was meeting that. Again, $2 billion, 10% EBITDA, cash flow 45%, approximately of EBITDA, this company will be funding itself with very few, very quickly. So it's a plan, it's not concrete. But it could be better and it could be worse, but it's not going to knock us out one way or the other. I appreciate everyone's support, and particularly the officers of the company and our employees. And we're looking forward to it. We're going to go after this plan, it is the plan but we believe we can accomplish it. Thank you very much and we look forward to the next meeting.

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