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Park-Ohio Q4 Earnings Conference Call: Full Transcript

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Transcript

Ticker PKOH
Company Park-Ohio Holdings Corp.
Event Name Q4 2015 Earnings Call
Event Date Mar 14, 2016
Event Time 10:00 AM ET

Presentation

Operator:

Good morning and welcome to the Park-Ohio Fourth Quarter and Year End 2015 Results Conference Call. At this time, all participants are in listen-only mode. After the presentation, the company will conduct a question-and-answer session. Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

Before we get started I want remind everybody that certain statements made on today's call maybe 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. Risks and uncertainties maybe found in the earnings press release as well as 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 reconciliation of net income attributable to Park-Ohio common shareholders EBITDA as defined, please refer to the company's recent earnings release. I will not turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed Mr. Crawford.

Edward F. Crawford: Chairman and Chief Executive Officer:

Good morning ladies and gentlemen. Welcome to Park-Ohio's 2015 Report Card Review. I would like to turn over the call to Matthew Crawford, the President and COO of the company. Matthew.

Matthew V. Crawford: President and Chief Operating Officer:

Thank you very much and good morning. We're 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 the strong performance of our supply technologies and assembly components 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%, so $1.467 billion from $1.378 billion in 2014. We experienced both top and bottom line growth on our supply technologies and assembly components business due to strong demand from heavy-duty truck, automotive, power sports, and semiconductor end markets. But our engineered product segment continues to be effected 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 product segment and that reduced demand from oil and gas and steel related products.

As we previously discussed is gross profit margins in these end markets are higher than our average gross margins particularly in the aftermarket product 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 noncash charge of $2.2 million related to a court judgment in the EBSCO case which is been in litigation for several years. We expect to appeal the court's ruling in this.

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

As we discussed on previous calls, the effective 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 effective currency changes since last year.

Now let's discuss the fourth quarter of 2015. Our US GAAP earnings in the fourth quarter of '15 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 '15 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 $373 million in the prior year. The decrease is attributable to reduced demand in the oil and gas and steel industries as well decreased demand from certain end markets from our supply technologies 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.

Gross profit margin percentage was 15.6% compared 15.3%. The increase in our gross margin percentage was primarily due to the improved margin and supply technologies and in our General Aluminum business, and a continued focus on managing costs throughout the business.

SG&A cost increased in the fourth quarter of 2015 as a result of employee severance cost incurred. These are onetime 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 semiconductors end markets were strong. During the fourth quarter, we began to see weaker demand from these markets as well as semiconductor and industrial capital equipment, which had 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 at 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 to year. This improving 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. Operating margin 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 continues to be affected by historically low demand for new equipment and after-market products and services throughout the year.

Low demand from our oil and gas, tubular steel, and military aerospace customer has been a challenge for the business throughout 2015 and we expect well into 2016.

For the full year 2015, the effect of the industry-wide slowdown in oil and gas, steal and military aerospace markets impacted our operating income by approximately $21.8 million. We continue to aggressively reduce costs, implement operation improvements and launch new customer initiatives as we manage in 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 continue 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 in high return internal projects for Assembly Components segment, which will grow sales and enhance product margins in the future.

Overall, we're pleased with our performance in 2015. Despite the headwinds we're faced in our Engineered Product segment, the diversification of Park-Ohio was evident as other businesses grew in sales and profitability, which include international expansion, introduction of new products and continued investment in highly engineered and proprietary solutions.

At this time, we'd like to provide you with the 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 the 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 million 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 discussed above, we believe we're well-positioned to go across the company and once again achieve record results. Thank you very much.

Edward F. Crawford:

Thank you Matt, great job. Well 2015 was very a difficult year for most operating companies in the U.S. However, we're very pleased with our ability to continue our seven-year winning streak, apposing 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, making it very difficult to acquire something with long-term value with a company that can grow at the same pace that the major company, the current company is, which has been wonderful.

So -- but we did switch to the concept of investing in organic growth to capital equipment and we're really going to see the beginnings of the payback of that in '17, '18 and '19. The investment in capital equipment around diverse line number of our units were selected, where we could imply 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're committed to growth here at Park-Ohio. We intend to -- 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.

Question & Answer

Operator:

Thank you. [Operator Instructions] Our first question today is coming from Christopher Van Horn from FBR. Please proceed with your question.

Christopher Van Horn: FBR Capital Markets:

Hey. Good morning, guys. Congrats on the great margins.

Edward F. Crawford:

Good morning, Chris. Okay. Thank you.

Christopher Van Horn:

Just a couple of questions. Could you--when you are talking about you know it seems like CapEx is certainly ramping up compared to '14 and do you think about CapEx spend as a percent of sales or do you more look as a growth opportunities you see within the business and then kind of a secondary off of that, is the investment mix that you're seeing from an end market perspective similar to what your revenue break out as in terms what end markets you're addressing in your growth CapEx?

Edward F. Crawford:

Well as we have talked in the past, Chris, it was clear in '14 that we were not going to able to do any real acquisitions along the lines that we're committed to and we have long history we have been very prudent buyers here at the company. We have 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 talk for together and brought asked everyone for every side we'll bring in there both plans and where they would invest money within their organizations, what was the best plans and we spend a couple of weeks looking at this and one by one we determined the once that were long term in nature for example, the 10-speed transmission starting up in the Aluminum division which is contracted a 10-year contract, but the potential CapEx. So, we merely aimed the CapEx at the growth potential within each and 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 and but the difference is with organic growth number one you have to make investment, order the equipment, get it up and running, and we're talking about forging lines and all types of very sophisticated equipment. It's a long run way. It takes two years minimum from the day you received your order till you start getting any revenue but the margins are higher. The margins are higher than quite frankly and with even good acquisition. So, this is not a knee-jerk reaction. This is something as an alternative choice.

If you won't pay nine times and you want to continue to grow organically, you have to look within your units and as one thing we have our customers. We have lots of customers around the world. There is lots of opportunities, we just pick up the litter. Whoever had the best idea with the best return with the least amount of CapEx, that's where we decided to go that but that concept is my view point I think it has kind of run its course.

We're finished with that. Now we're looking for other ways to grow the company and may be move back to transactions, maybe a little shake up, and a little softness in economy and everything else, down comes the multiples of EBITDA that these companies are willing to pay.

Matthew V. Crawford:

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 boy, it's $30 million on a $1.5 billion isn't a lot but that's part of the, part of the reason we think that $35 million is somewhat of a kind of number that is the right number of 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 faster manufacturing unit, and in our automotive segment and 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.

Christopher Van Horn:

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 and where that's coming from. Is it mainly product mix, is it better efficiencies on the operating line, is the combination of both? Any sort of a walkthrough of that would be great.

Edward F. Crawford:

yeah we touched on it a little in my comments but maybe I could revisit it by saying, supply technologies I think that we had solid volumes last year, as a year, got softened in fourth quarter undoubtedly but throughout the year, we saw great utilization at most of our locations particularly those related to auto and trucks. So, no I think we also saw some nice products mix towards some proprietary products which I think accomplished slightly higher margin. So we had excellent, excellent mix of product and excellent utilization in that business during 2015.

I also would like to touch a little about assembly components. Certainly that is the--that is the auto focus part of our business, good volumes, slightly improved pricing in some areas that were under water. So should think we addressed that business, so we have 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.

Christopher Van Horn:

Great and then one more, if I may. Within auto, it's obviously been an area of straighten 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 your you got a little bit more exposure than the average in the company and then in that same vein, is there any opportunities for customers where you're may be under-penetrated that you see an opportunity going forward?

Edward F. Crawford:

Well Chris, I can answer that and I will but we look at it a little differently here, you mean Yes, we have customers, ones important than the other. That can happen. But again, our concentration, our investment in the auto industry and we can go back, this really started in '10 and '11, is we are looking at the 90 million cars in the world, not just 16 to 17 in North America and we have been very, very patient about deciding instead of selling just one item, all -- 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 only aluminum, the lightening of the cars, we got ourselves in gas injection, which is really a growth industry. We got ourselves into the hose business, that turbocharge business which is excellent and a few filler systems. So we have four product lines that we are trying to sell into 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 two those products and hopefully soon three in China, in Shanghai, and we are making products there with people like General Motors for their production cars.

So this not about an event in the car business where we are just going to sell more aluminum parts, we are going to sell more pieces in the car. So if the car volume comes down even in North America, we are going to have a bigger piece of the pie. But the exciting part here is about the international concept and we are really embedded deeply, particularly with General Motors and the opportunity in China, being all those Chinese car companies, they did well for a while, but they're really falling behind, and we are taking bigger and bigger market share in General Motors and soon to be Ford.

So these relationships we have, we can sell them more products. What's great about the turbo charger business and the gas injection, 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. I mean, 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, why would you go deeper into the auto business? Well, we're deeper in the auto business at the right time.

So may be thought a lot, maybe we got a little lucky, but we're there with a lot of platforms across the board. So, one -- at any particular moment might be important, but not the 90 million. It doesn't represent that. So we're excited about following this, following our customers in this business and looks like hell of a runway for the next two, three years, especially if China comes back and India starts to slide up, that's the next place we go.

Christopher Van Horn:

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

Edward F. Crawford:

Thank you.

Operator:

Thank you. As a reminder if you'd like to be placed in the question queue, please press star one at this time. Our next question is coming from Steve Barger from KeyBanc Capital Markets. Please proceed with your question.

Steve Barger: KeyBanc Capital Markets:

Thanks, good morning guys.

Edward F. Crawford:

Hi Steve.

Steve Barger:

First question is on the guidance. You tightened the high-end of the range, but kept the low end. 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 feel lower number that you're confident in and you're depending on some positive swing factors as the year progresses?

Edward F. Crawford:

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

So, I am not saying that I should--we're going to change that number. That's our goal. We intend to make that goal and it might seem they're others but by the 4, 5 to 423, the one thing that our goal, that we will accomplish is revenues have to be up year-over-year and the earnings per share has to be up to year-over-year So, that's just a view that we had a month ago or there abouts and we are here today and we're going to have work reviewing what we hired but that's okay. We are a company that we got to it last year, the year before, and we're going to get to it this year.

But we are not going to subscribe to use rope in this atmosphere. I mean it--maybe it's modest by someone's opinion but that's the number and we're going to grab it and we think we can make it and that's 405 to 423 is nice range and that's where we are.

Steve Barger:

Got it. So 1Qs almost in the books as you look at the cadence running through the year is 1Q definitely the low quarter and then it kind of ramps sequentially through the year, is that how you are looking at it internally?

Edward F. Crawford:

Well, it has been over the last three or four years has been the tendency. This is always a 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 at my judgment relative --anything that we're beyond in the first quarter we believe we can make up. Okay.

Steve Barger:

Got it. Yes.

Edward F. Crawford:

It's about how you start these years, it's how you finish them.

Steve Barger:

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

Edward F. Crawford:

Well I think you kind of summarized it, that's kind of a plan. I looking for us of course it's going to be a little bit down in the beginning it's going to increase as we along but we as have many upsides or more that we have downsize. The downsize everyone knows the downsize. Whoever knows the first quarter is going to be slow. Hopefully we'll get our self an election here and maybe the taxes will come down and if the taxes come down, the earnings are going to go up.

I mean there is a lot of magic to this. In the bottom line you are going to have to work with what you are working with and the balance portfolio of this company is always something working. I mean one order and gas and oil business which we have zero in for gas and oil we have nothing in for the military, we have nothing of a lot 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 like very much to be correct and exceed this thing and will 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 mean.

Steve Barger:

Got it. We talked about supply check on an organic basis, or in aggregate productions schedules coming down, or I guess just more simply, do you expect revenue there will be up or down in 2016?

Matthew V. Crawford:

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 '16.

So we're going to need to effectively and we anticipate, effectively offsetting some of that weakness with new sales this yes, which we've been working hard over the last couple of years. So, I think that, no, as we sit here today, those rates are softer than they were this time last year.

Steve Barger:

Yes. I'd 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?

Matthew V. Crawford:

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're seeing customers who are a bit shell shocked a little bit at how things softened in the fourth quarter and are looking to combat it.

Edward F. Crawford:

Hey, Steve again, it's interesting as I talk with people about the '16, '15 was a tough year, a lot of unknowns and '16 isn't much better, okay?

But, so, 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 know we're a little more excited about the things, the good things going to happen if the damn settling come out. I mean, if we could settle these little things and get these things going again in America, we're going to do very, very well.

So, while there is unknowns out there which there is, our job will be here is to run the company and as modest as it maybe, increase the revenue and 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, that 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 number and the business is there, the customers are there, we just have -- 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 is no indication of where we're going in the company. I can tell you that.

We are not any but optimistic over here. We're just being stewards of a tough environment, you got to do what you got to do to stay in the game, be 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.

Steve Barger:

Understood. One more and I'll get back in line. So, you are guiding that 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.

Patrick Fogarty: Director of Corporate Development:

Steve, this is Pat Fogarty. As you know, our working capital range is from about 23% to 24% of sales. So our sales grow, we are going to have some additional investments in working capital and we expect that during 2016. I would say that the increase that we are going to see is less than what we had in 2015 but we do expect to increase our working capital for the year.

Matthew V. Crawford:

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--the new customer launch in the supply technologies as well other parts of the business. As you know that particular part of the business, supply technologies is a little more working capital intensive.

So if our mix shift's a little bit towards success in those new customers then you might see a little usage and that's a really good thing.

Steve Barger:

Got it. Thanks for the time gentlemen.

Edward F. Crawford:

Thank you very much.

Operator:

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

Edward F. Crawford:

I would like thank all the stakeholders and investors in the company, the key employees. We're excited about the future here and as I just indicated we'll be a little bit careful here but that 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.

Operator:

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

Posted-In: Earnings News

 

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