Park-Ohio Holdings Corp.

Good morning and welcome to the PARCC Ohio second quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the presentation, the company will conduct a question and answer session. Today's conference is also being recorded. If you have any objections, you may disconnect at this time. 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 2020 10-K, which was filed on March 5, 2021, with the SEC. Additionally, the company may discuss adjusted EPS and EBITDA as defined, adjusted EPS and EBITDA as defined or not measured of performance under generally accepted accounting principles, for reconciliation of EPS to adjusted EPS, 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 now like to turn the conference over to Mr. Matthew Crawford, Chairman, President, and CEO. Please proceed, Mr. Crawford.

Good morning and thank you for joining us. I have Pat Fogarty, our CFO, with me, and after some comments, we'll open the line for questions. While we're pleased with the continued broad-based rebound in revenue across our business and end markets, the second quarter was frustrating as we managed a complex backdrop of challenges. Supply chain challenges, most notably related to semiconductor chips and our auto business, not only caused a significant reduction in revenue for the quarter, but perhaps more daunting caused weekly volatility in demand that created significant inefficiencies in our manufacturing facilities. In addition, availability of labor and labor costs were daily challenges across our North American footprint and exacerbated difficulty at locations which were seeing increased demand from their customers. Lastly, increases related to inflation in raw materials and freight continue to put pressure on the current period profits. Most of these challenges we discussed during the first quarter call, but the size and the speed with which they continued in the second quarter, especially in automotive, was more significant than we had anticipated. Having said that, our team continues to address these challenges with urgency, and although it may be difficult to see in the results, our strategies around pricing, continuous improvement activities, reducing costs through investment, and utilizing our flexible manufacturing footprint continues to pay dividends. Pat will outline some of the specifics, but we anticipate that we have worked through some of the most challenging issues and will return to a more normalized profitability environment as the year progresses. On a more positive note, new business awards continue to outpace budget across our company. Notably, our engineer product segment has seen robust booking activity during the quarter. Recovery in this segment has taken longer than we hoped, but we have confidence that this segment which has historically led our business in margins, will make meaningful progress during the remainder of the year. I want to thank the entire Park Ohio team. While these results are not what we have worked for, I'm proud of the way we have worked tirelessly supporting our customers and helping each other during a quarter filled with unexpected difficulties. With that, I'll turn it over to Pat.

Thanks, Matt. Our second quarter results reflect continued end market strength in our supply technology segment, the impact of the semiconductor chip shortage, increasing raw material and labor costs in our assembly component segment, and strong bookings of new orders in our engineered product segment. Our consolidated net sales of $350 million in the quarter were up 53% compared to a year ago, as demand levels in 2021 have substantially recovered, from the low demand levels from a year ago caused by the pandemic. On a sequential basis, net sales in supply technologies were consistent with first quarter levels and net sales in our engineered product segment increased 13% in the second quarter. The overall decline in second quarter sales compared to the first quarter was driven by the impact of the semiconductor chip shortage on product sales in several key OEM platforms, including the Ford Explorer and F-150, the Jeep Cherokee, and the Chevy Equinox, which impacted our assembly component segment. Gap EPS for the quarter was a loss of 44 cents, and adjusted EPS, which excludes primarily plant closure and consolidation costs, was a loss of 33 cents. Our operating loss in the quarter was a direct result of the chip shortage, which caused significant volatility in certain facilities where volumes on key platforms fluctuated widely from week to week. We estimate the impact on our net sales in the quarter was $24 million, resulting in an EPS impact of approximately 55 cents per share. The EPS impact was a result of the low production levels in certain facilities, the labor inefficiencies caused by the demand volatility and labor shortages, and the low fixed cost absorption levels. In addition, significant raw material increases, most notably rubber compounds, used in our molded and extruded rubber businesses, and aluminum alloys used in our aluminum casting facilities impacted our results by an estimated 15 cents per share. We expect the recovery of these raw material increases will occur throughout the second half of the year once pricing begins to stabilize. Other less significant impacts to the quarterly results included a labor strike at a key heavy-duty truck assembly plant impacting supply technologies results, and increased freight costs and supply chain constraints affecting most of our businesses. These unfavorable events overshadowed the continued performance in our supply chain business and improved results in our capital equipment business. Our SG&A expenses were $43 million compared to $35 million a year ago, returning to a normal level versus a year ago. As a percentage of net sales, SG&A expenses in the current quarter decreased to 12% compared to 15% a year ago. Interest expense totaled $7.4 million compared to $7.5 million a year ago, the decrease driven by lower average borrowings during the quarter. The income tax benefit in the second quarter of $2.8 million represented an effective tax rate of 34%, which is higher than the U.S. statutory rate of 21%, due primarily to the recognition of certain discrete tax benefits during the quarter and the composition of earnings. For the full year 2021, we estimate an effective tax rate of approximately 22%. Our liquidity continues to be strong and total $221 million as of June 30th, up 12% compared to a year ago and consisted of $55 million of cash on hand and $166 million of unused borrowing capacity under our various banking arrangements. During the first half of the year, net cash used by operating activities was $23 million, primarily to fund higher working capital levels. During the second quarter, inventory levels increased significantly in support of increased customer demand levels, extended supplier lead times, and global supply chain challenges. In addition, higher raw material and inbound freight costs and inventory bills to support our various plant consolidation activities also increased our inventory levels. We expect the incremental levels of inventory, which approximated $25 million year to date, will decrease in the second half of the year and return to more normalized levels. Capital expenditures during the quarter were $8 million, primarily in our assembly component segment, for new equipment to support new business launches in our aluminum and molded rubber products businesses. We continue to estimate that our full year 2021 CapEx will be in the range of $28 to $32 million. Now turning to our segment results, in supply technologies, net sales were $155 million during the quarter compared to $158 million in the first quarter and $94 million a year ago. average daily sales during the second quarter were similar to first quarter levels despite lower levels to the due to the heavy duty truck and market caused by the labor strike at a major assembly plant which affected a full month of sales overall we saw continued strength in most end markets most notably in the semiconductor power sports civil aerospace and the electrical distribution end markets we are encouraged by the sequential improvement in sales to the civilian aerospace market, which was up 45% compared to last quarter, and sales from our recent acquisition, NYK. Operating income in this segment totaled $10.2 million, and operating income margin was 6.6%. Operating income and margin were both impacted by higher inbound domestic and import freight costs, including expedited freight caused by global supply chain constraints and the impact of the labor strike. Excluding these factors, second quarter sales and operating income would have exceeded first quarter levels. In our assembly component segment, sales were $110 million compared to $126 million in the first quarter. Sales in the current quarter were negatively impacted by the semiconductor chip shortage, which resulted in lower sales of approximately $20 million in this segment. Weekly demand fluctuations and OEM plant shutdowns and delays had a material impact on certain plant production schedules and sales during the quarter. We expect the shortage will most likely remain a challenge for our auto-related businesses throughout the second half of the year. Although it is difficult to project the full year impact at this time, we estimate that the sales impact in the third quarter will be approximately $15 to $20 million based on current customer schedules. As we have mentioned on previous calls, we continue to launch new business in this segment, which we expect to positively impact sales in the second half of the year. We incurred an operating loss of $6.1 million in this segment compared to operating income of $6.4 million in the first quarter, driven by several factors. First, the chip shortage continues to impact automotive demand. and many of our operation causing extreme fluctuations in production and significantly higher plant operating costs. Second, rising raw material prices, especially in our aluminum rubber business, where prices have increased in excess of 20%, unfavorably impacted our profitability. We expect to begin to recover these higher material costs throughout the second half of the year as customer pricing adjusts to the market. And finally, increased labor costs caused by local labor shortages continue to impact our operations in this segment. In response to the labor shortages affecting certain plants, we increase wages and other benefits to help retain our direct labor workforce and increase the use of temporary labor. As a result, the second quarter was impacted by the increased wages, training and recruiting costs, production inefficiencies, and higher scrap levels. In response to these operational challenges, we have realigned capacity levels and shifted certain processes to facilities with open capacity and lower labor costs. Also during the quarter, we incurred nearly a million dollars of charges related to plant restructuring, closure, and consolidation activities. We expect these actions will positively impact the segment's performance in the second half of the year. In our engineered product segment, sales were $86 million compared to $76 million in the first quarter and $79 million a year ago. Sequentially, sales increased 13%, driven by increased customer demand in our capital equipment business. In this business, sales were at their highest level since the first quarter of 2020. More importantly, new capital equipment order levels continue to improve. During the first half of this year, our new equipment order levels increased 65% compared to the second half of 2020. New orders, which totaled over $45 million during the second quarter, came from customers throughout every region globally and in various product lines, including induction hardening applications and melting systems for the steel and foundry end markets. We continue to see strong bookings of new capital equipment orders during the month of July and believe sales and profitability in this segment will increase in the second half of this year based on the strength of our backlog. In addition, our aftermarket sales and services business in both the United States and Europe has increased each quarter since June of last year. We expect that the trend will continue. In our forging and machine products business, sales continued to be impacted by low demand from several key end markets, including oil and gas, commercial and military aerospace, rail, and agriculture. Profitability was negatively impacted by the lower sales levels, as well as higher production costs and downtime at our forging plant in Arkansas, and additional costs to complete certain legacy forging equipment orders, which were delayed during the pandemic. The operating loss in this segment, which totaled $700,000 in the current quarter, was primarily driven by the lower sales and operating losses in our forage and machine products business, and $600,000 of costs related to plant closure and consolidation activities. And finally, corporate expenses totaled $6.8 million during the quarter. On a year-to-date basis, corporate costs totaled $12 million in the first half of the year compared to $14 million in the second half of 2020. With respect to our previously communicated 2021 financial outlook, we continue to expect year-over-year organic sales growth to be within the range of 8% to 12%, and capital expenditures to be in the range of $28 million to $32 million. With respect to our outlook regarding EBITDA as defined, We now expect margins to improve by 100 to 150 basis points over the 2020 EBITDA's defined margin of 5.6%. And finally, due primarily to the working capital required in our businesses, we expect to use up to $15 million in free cash flow for 2021. Now I'll turn the call back over to Matt.