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.

Thank you, Pat. We open the line for questions. I want to reiterate our frustration around these results. We believe strongly as a management team they do not reflect the progress on executing what we expect to be a fundamentally reshaped business after we complete the restructuring. I want to remind people of three things we've worked tirelessly on and discussed on each call. First is the restructuring. We continue to be involved. You see from the results, we have some restructuring add-backs. Our priority is to emerge in the next 12 months as a business, a leaner, more focused business that can be more nimble in these more challenging times. So when we started this restructuring, one of the things that we didn't focus on as much and now we're laser focused on is the availability of labor. And Pat mentioned that in his comments. So as we continue to restructure the business and make ourselves more lean and more nimble and in a position to garner more operating leverage, we're now also focused on where we can find labor. So that's changed some of our thoughts around the business, but it has not changed our appetite to continue the restructuring towards this goal. Secondly, our initiatives around investing in our best and highest return products and services. We have innovation happening across the business and across the segments. We have a number of new product launches and ideas that continue to drive new business sales at high margins, and we're not walking away from those. Those are great, great ideas across the business, and we continue to focus on innovation in our company. And also, we're focused on deleveraging while growing the business. Um, we've had to utilize more cash than we thought to secure our supply chain. Uh, in many, many cases we're in long-term agreements, uh, and we need to, uh, focus on, on fulfilling or fulfilling the customer's needs. So we've had to protect, uh, our supply chain by, by using more cash than we would have expected. This point doesn't change our goal about deleveraging while growing, um, new business, as I mentioned, is ahead of schedule. Also pricing has taken center stage. So pricing now is a key prong in our growth strategy as well in our margin enhancement strategy. We made a ton of progress on that in the second quarter. Some of it is delayed. Whether it be contractually, we negotiated increases that don't kick in until during the third quarter, or in some cases, like in our aluminum group, we have indexed pricing that trails the market by three months. It's quarter over quarter pricing. The good news is it's contractual. We'll see the increases. The bad news is in a rising raw material environment, particularly the spike we've seen in aluminum, those increases trail the market. So, you know, again, that's so those are three things that we continue to be focused on. We're continuing to be focused on them and observing the new environment. And we're staying committed to all three. So with that, I will turn it over to questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before using the star keys. One moment, please, while we poll for questions. Our first question is from Steve Barger with KeyBank Capital Markets Incorporated. Please proceed with your question.

Thanks. Good morning, guys. Good morning. Matt, you maintain the sales guide, so it sounds like this isn't a demand problem. It's more timing. So just going back to the inventory comments, are you running any of the plants on a more normalized basis now?

and just holding the inventory to ship when needed and can that help with labor and absorption yeah i'll i'll start with that um again i i a lot of progress continues to be made well supply technologies is performed well in the environment um you know engineer products is making progress uh that we're very happy with i'll be a little more slower than we would have expected we're really focused on the automotive segment right now and in response to your question uh we have built inventory there we are trying to normalize but uh it would be hard to i don't think we've ever seen an environment quite the way it is um you know just as recently as yesterday gm released and just before they released they talked about taking their three truck plants down for next week so they talk about chips i'm sure it's related to chips my guess is they must have known what their chip inventory was so I suppose there's some other supply chain challenges as well. I think that our desire to build inventory has its limits. We don't always know in this environment where SAR will be and how the OEs will allocate their supply chain issues on chips and other things. So we do have an appetite to... Tad Piper- relieve the inventory, we do have an appetite to build inventory when we have Labor and we can do so competitively and profitably. Tad Piper- But there are programs that they now believe for the year well established programs that the OEMs that they now believe. Tad Piper- will will ultimately they will buy a third or 40% of what they thought at the beginning of the year, so we got to be careful building inventory into things that that the losses could be more permanent for certain models.

Yeah. And I think Pat mentioned some of this in his script. So as you think about that with your labor issues, does it make sense to have less rooftops or more product line diversity in specific plants? Just kind of how are you addressing that longer term?

It's a great question. Pat touched on it and I did. We have taken, the answer is our expectations around this restructuring before this quarter was about having less rooftops was about concentrating where we have the best positioning for long-term competitiveness a lot of that was exclusively around costs in the past that now I think it's a little bit about availability of labor and consistency so I think our formula if you will is a little different in terms of how we think about it but yes the restructuring continues to include less rooftops and investing in our world-class locations so unquestionably, and that will be true in the automotive group as well. We need, again, this is an example that we need to not only focus our restructuring on cost, but also on being nimble. This has a lot to do with being nimble. So we need to be able to react in an environment for the next decade that could see fluctuations around build rates on a particular model. It used to be 10% in a year was a big variance to what they thought they'd build. And they would do it through rebates. They would just push a product line because they were set up to build it. What we're seeing now is volatility that's going to require suppliers to be way more nimble than they would have in the past. So that's, you know, we were going that direction anyhow. We're going faster. And, again, this is an area where this is frustrating for we at Park Ohio and in our automotive group because, again, We think we're making a lot of progress on that, and it doesn't show up in the numbers, and we understand that that's not good enough.

And just given how fast things are changing, how do you think this plays out in the back half? I guess why do you think it gets better, and are you seeing other areas of material availability problems?

I'll just say I don't know how it could get worse. I mean, I'm joking a little bit. But let me ask Pat to answer that more explicitly.

Yes, Steve, I think a couple of things are expected to happen in the second half of the year. Clearly on raw material prices, we expect to recover some of those large increases that we saw in the second quarter. You know, I mentioned, you know, raw material prices were up 20%, which is obviously a huge increase in a given quarter. For the full year, aluminum prices are up 30%. Rubber compounds, we expect to continue to be somewhat volatile, although our customer price increases, we hope will cover some of the increases. In the quarter, we moved a significant amount of operations to different plants to free up labor. We expect the benefit of that to happen in the third and fourth quarters. In addition, we're launching some and have launched some pretty large programs in the automotive group, including fuel rail products for the Gen 5 engine, which we expect to significantly impact absorption levels in certain plants. Our business that has been expanding in Mexico, in Acuna, continues to to perform very well with recovered volumes in the new business that we're launching. We expect a nice flow through of profitability on the increase in revenues. So those are some of the things happening in assembly components. I think maybe a more exciting story that we're seeing is within our engineered product segment, where our backlogs are at a level now that we feel should enhance our profitability in the second half of the year. Having a quarter with $45 million of new capital equipment bookings is a level that we haven't seen in a long time. The timing of production of those new projects will take hold in the second half of the year. So we're very optimistic there. The aftermarket parts and services business continues to trend in the right direction. You know, all that being said, in a segment where we still see low volumes from oil and gas, we still see some low volumes in some of our forging products. But overall, that's a real positive story that we expect to take hold in the second half of the year. Supply tech continues to perform as expected and above our beginning of the year operating plans. We expect end market strength to continue. It was nice to see the civilian aerospace market pick up in the second quarter. We expect that to continue throughout the second half. So a lot of real good things happening, and some of the challenges faced in the second quarter we expect to improve on in the third and fourth quarter.

Steve, I would add, I want to be explicit in what Pat said. it will take a while for the human resources strategy to settle in. There is permanent cost increases in doing business, which will have to ferret out. But our results in the second quarter, our poor results, reflected problems with availability of labor, which included having to work seven days, which means even higher costs. It means scrap rates. It means... You know all kinds of issues that come with trying to operate in a facility where you can't get enough people to meet your contractual requirements. So I think is that will begin to stabilize and then we will have to continue to focus on the pricing side of it is to recoup the additional cost of doing business. So we sort of saw the worst of both in the second quarter. We won't work through both sides of this for a little while, but but we will begin at least to see some stabilization Our goal right now has to be nimble enough to make sure that we're working five days a week and we're working profitably in the programs that are running.

Really appreciate all that detail. I'm going to ask one more and I'll get back in line. I know you didn't have full guidance out there, but I just have to ask, why not pre-announce or just give some heads up to let people know that results were going to come in well below expectations as you saw the quarter unfolding?

Steve, I'll address that. We, you know, our guidance that we give is really minimal guidance around revenues and EBITDA margins. Our quarterly numbers often fluctuate significantly. We do not give EPS guidance. And we felt that the guidance that if there was to be an advance release would not come with the color and the details and the context of some of the reasons why, which is important that we have this call and be able to communicate kind of the reasons why without doing it in an advance release.

Understood. Thanks.

Our next question comes from Sarkis Shabachan with the B Reilly Securities. Please proceed with your question.

Hey, good morning, and thank you for taking my question, Matt and Pat. Of course, Marcus. Good morning. Yeah, so just want to pick away at the revised guidance here. I think if I look at the top line, even if we take the low end of that, right, for the first half sales performance, for example, and then just kind of back out what we're expecting for the second half, I think it's let's say round number say 690 million and top line in the backup, you know, you gave the reasons on why you feel that that's comfortable or appropriate. I think the area that I'm having a little bit of trouble with is the margin improvement on EBITDA. You know, it's kind of 100 basis point year over year improvement would imply at least second half EBITDA of, let's say, $25 million a quarter. Just kind of help me reconcile that given, you know, $12 million of EBITDA posted here in 2Q. Right.

Well, I think, Sarkis, we expect, you know, quite a bit of improvement coming out of our assembly component segment based on the information that, you know, we've indicated, new business being launched, the flow-through activities in our engineered products group in the second half of the year based on the increase in the volume is significant. You know, that business has historically been our highest margin business. So we expect, you know, much higher margins coming out of that business segment. In supply technologies, another good example where we, you know, we were hit hard in the second quarter by some of the increase in freight, both ocean freight as well as expedited freight. We expect much of that to ease in the second half of the year, which will enhance our margins. So those are some of the things that have been built into this revised margin outlook that we believe are very positive.

Gotcha. Thanks for that. And, you know, from some of the tech players out there, we're actually hearing, you know, chip shortages lasting through 2022. I guess, you know, can you reconcile kind of what you're seeing real time on the ground versus, you know, what some of the tech players are saying? I just want to get a sense for, you know, how long this lasts and obviously how it impacts you and your customers, you know, perhaps into 22. Thank you.

Yeah, I'll take that. Strakis, this is an interesting question and one at which we don't really have full visibility to. No one does. What I will tell you is we believe that this will continue to be a challenge at least for the rest of the year. I think that we will, in fact, to be quite honest with you, I was pleased and surprised to see some of the guidance from the OEs on this on their revenue and profits for the rest of the year, so. I would say that it will likely. The process will hopefully be more transparent as the year goes on, so we can be more efficient in our operations. My guess is it will alleviate a little bit, and I think that's how we planned our business. to be more efficient, to be, you know, we've gone through the learning curve a little bit in terms of how to be more responsive at a more profitable level. But I think that while the worst may be behind us, I anticipate this being an ongoing issue for the rest of the year and probably into early 22 before I think operations can resume with any type of normalcy in the automotive supply chain. So maybe the worst is behind us, maybe, but I agree with what you're suggesting. And we can only hope that we can, there's more transparency and more ability to schedule properly going forward. And again, I'm encouraged but surprised with the positive comments coming out of the OEs over the last couple of days.

Got it. That's helpful. And I guess if I can just kind of go back and two things kind of stuck out in the press release.

One is

The $0.55 impact on the $24 million in I think it was the sales call out. And then I think in the prepared remarks you mentioned the rubber compound price in aluminum alloys impacting the quarter by $0.15 a share. I guess if we were to kind of step back and look at the $0.15 per share impact you just called out relative to the pricing you're taking, how quickly do you think in the back half of the year this $0.15 a share kind of comes back in to the P&L?

Yeah, most of that price increase, Sarkis, is in the aluminum products business. And as long as we see the price per pound stabilize in the second half of the year, we'll recover 100% of that impact. We did see a slight increase in aluminum prices in the month of July. Although I guess that's a victory if it's only a slight increase given what's happening in the year. But if price is stabilized, we'll recover through customer price increases that entire impact.

Understood. That's all for me. Thank you.

Our next question comes from Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Good morning, guys. Thank you for taking my questions. Morning, Marco. I was wondering if maybe you could put a little bit more color around some of the headwinds as it relates to the revenues and the automotive impact. You talked about Q3 having another 15 to 20 million hit, but at the same time, you've got some really nice new business launches that are expected to kind of positively impact second half sales. Can you kind of walk us through how you're thinking about that? From a revenue standpoint.

Yeah, yeah, Marco. You know the the the impact of the chip shortage was solely related to that. We we believe based on new new business being launched that much of that will be offset by. By the new programs being launched and the expected production, you know, in the second half of the year.

Okay. And then in terms of the labor shortages that you're seeing, can you maybe just put a little bit more color surrounding that? Is that just kind of what your experience and what most individuals are seeing where it's just difficult to find employees because of either stimulus checks or because of the unemployment rates or there are other sort of factors that are sort of impacting you there when it comes to your labor?

Well, this is Matt. Marco, I would say, first of all, this is a regional issue. Different locations are impacted differently. So I don't know that there's a one-size-fits-all answer to your question. In the most affected areas in our business, I think the answer to each of your comments would be yes. There is tremendous rate pressure and competitiveness for those people willing to work. So people show up to work, and then they find another job. So it's a lot of time and money spent on onboarding, and then they don't come. There are a significant number of people suggesting that they'll come in for, you know, reply to our desire to bring people in, and then they don't show up. And I think that does have something to do with their ability to apply for unemployment under the more relaxed standards currently. So it's hard to put my finger on exactly. But it's all the above for the most affected locations and and some are affected much more so than others. Hence our strategy as part of our restructuring to be cognizant of where we see good pools of labor more long term.

Understood. Then kind of shifting here to your engineer product segment, it sounds like things are definitely moving in the right direction. Based on what you kind of see right now, do you expect to kind of get back to that pre-pandemic revenue levels and the $100 million to $150 million revenue run rate by the end of this year, or is that more of a fiscal 22 type event?

I think we're going to see a gradual improvement in our revenues in that segment, but I would not expect it to get to that $100 to $150 million quarterly revenue in the current year. But we're heading in the right direction. Having backlogs that exceed $45 to $50 million is a good start to get us back to historic levels.

Understood. And then your comments in regard to the oil and gas segment, kind of a little bit of underperformance there in the E&P group. A little surprised by that, just kind of given where oil prices are currently. Can you maybe provide a little bit more information in terms of what you guys are seeing there? What's kind of holding that back?

Yeah, this is Matt. You know, we touch that business in a few different ways, but I would tell you that by and large, our activities are more upstream. And I think that it's been clear, whether it be in the rig count numbers or the comments from some of the big drivers of the upstream business, that their strategic goal is to return more money to the shareholders and drill less. So I think that what that means to us is we still have a good business. Tad Piper- These are good high margin products were in many cases selling innovation and or something that it generally were the best source for, but we also see I think. Tad Piper- Both reduce drilling and a desire by the large players to defer spending, so I think that's got to play out a little bit until we see a return to normalization. And I know your next question is going to be, when does that happen? Because this business will come back, maybe never to where it was, but it will come back to be a meaningful contributor. And my guess is, you know, we're talking mid-2022 before we could expect it to be the kind of contributor in any measure that it's been historically. Or let's put it this way, to not be a drag.

Got it. And last quick question from me, maybe Matt, if you can kind of update us on your M&A pipeline. I know you guys just closed an acquisition in supply tech, but just kind of walk us through what the pipeline looks like today, what valuations are looking like.

Yeah, I mean, there's a ton of activity. As always, we're active to aggressively pursuing those that we see a fit. We've got a couple conversations ongoing. I don't think a seller's expectations have relaxed in terms of multiples. So I think that you can expect us to be active, but very careful as we've been the last year or so.

Great. Thanks a lot for your time, guys. Appreciate it. Okay, Mark. Thanks, Marco.

Our next question is from Jim Dowling with Jefferies. Please proceed with your question.

Good morning, guys. How are you doing? Good. Good morning. Good, Jim. I could be off on the timing, so give me a little benefit of the doubt, but maybe two years ago, two-plus years ago, you gave a thought as to what the long-term would hold, and my memory says you said we can get to a $2 billion revenue level and 10% plus EBITDA margin. If those numbers are accurate, reasonably accurate from my memory. Given all of the changes that you've seen in your aftermarkets today and also the restructuring that I presume you didn't foresee two years ago, what would you say is a reasonable EBITDA margin that's achievable once normalcy ever returns?

Yeah. Well, first, let me start by saying we believe that the businesses we own today, with some modest acquisitions, have the customers, the relationships, and the inherent growth, internal growth opportunities to meet that goal, particularly on the revenue side. Obviously, we're back at about $1.4 billion, $1.5 billion in what is a an environment where we still feel significant pressure on a few of our key markets. So while we haven't returned quite to pre-pandemic levels, we think that the new business over the next couple of years is going to be accretive. There's no question we took a major step back in our goals and from a timing perspective during COVID and the pressure on a couple of our markets was, again, it's still sustained. So, but I still believe inherently we can meet that goal in the way that I just mentioned. You know, the profitability goal is still intact. I would tell you we have more work to do on the restructuring side and on the pricing side than we did before COVID. Inflation of this type is not something that we considered when we put that plan out. And the good news is, about two thirds of our business. Well, let's say a little over half of our business reprices through the cycle. If you think about index pricing, probably two thirds of 70% of our business reprices through the cycle. And I think that's where Pat's been talking about. There will be some catch up. Having said it, reprices at zero margin. So in some cases we will retrieve some margin. But, you know, in an inflationary market, The bad news is I think we've got our work cut out for us in the pricing side in a way we didn't have it when we originally established those goals. So the good news is from our competitive position with our, which our customers, everything we do is more valuable in an inflationary environment. Our inventory is more valuable, our know-how, our customer relationship, our sourcing relationships, our manufacturing footprint, our tooling. So, you know, we are more important than ever to our customers. But we've got work cut out for us to meet those margin goals that were not foreseen. So I continue to believe that $2 billion revenue goal is achievable over the next three years, three or four years. We got our work cut out for us in the margin side, but we can make significant traction on that, particularly as we see some return to normalcy of our engineer products group. I mean, that's been sort of the laggard here. And as that improves, I think we're going to see some momentum towards that number. But we got our work cut out for us more so than we thought when we set that goal on the restructuring and the pricing side. That's just the world we live in now.

Okay, thanks.

Our next question is from John Baum. Please proceed with your question.

uh good morning guys uh first of all comment then a question um comment is in prior quarters or i guess you might want to call it a clunker uh you've uh it's been kind of an endogenous event that was something specific to park ohio but uh in this scenario the whole chip shortage is more of an exogenous shock hitting the whole oems and and the uh suppliers which you're on it right now so Um, I guess, uh, you have to work to that and you're working through it, but, um. I don't know what misery loves company. You've got a lot of, uh, you've got a, probably a lot of suppliers and that have the exact same situation. Here, and I know you guys are addressing that. So that's the comment.

The question is, John, can I just point something out to that comment, which gets sure we haven't had the opportunity to watch the whole learning cycle come through. But we're not surprised to see some of our customers, which are principally OEs, doing relatively well. If we drive by our customers and there are lots of whatever they might be selling, they're empty. Whether it's cars, trucks, or snowmobiles, they're empty. And they're empty because they sold everything they had in the second quarter. So I'm pleased to see how successful our customers have been. We root for their success. But understand, it was the suppliers that got hurt to your point in the second quarter, not the OEs. And it will be interesting to watch them navigate going forward as they got to replenish that. So our key is we'll see the volumes. We're going to have to see the volumes. The question is, can we execute? And to Jim's question a minute ago, can we execute at our margin expectations? So you make a very good point about about where we sit in the supply chain and what we can expect going forward.

Sure. And again, to that point, I know you made a comment, I think it might be in the prior quarter conference call, that a little bit of inflation is a good thing, to which I might respond, be careful what you wish for, because now you've got a lot of inflation. And You did adequately address the ability to try to catch up on the raw material increases, albeit on maybe a three-month lag, which makes sense. But specifically, I want to press you on this because I've had this question with other conference calls in whether or not we see inflation being so-called transitory here or really permanent. When you have to go out and hire And they talk about ghost employees that say, we're going to come in and they don't show up. I mean, and when you have to not, you have to materially increase starting wages. And then that makes it, it makes a difference with existing health because everybody talks these days regarding, you know, wage scales. And I, to the twofold question would be, I mean, what, what are you looking at in terms of an increase that you have for, for starting wages and then, How do you implement that and how do you price that in long term? Thank you.

Well, great question, by the way. And you and I share the opinion that the labor market is the inflation there is not transitory. It's almost impossible to not be. So, you know, we need to address that strategically around how we think about our our footprint and where we want to do business long term and cost and availability are part of it. Right. So everything you just said, We can't throw up our hands. We need to address that and think about how we want to do business for the next 10 or 15 years. I mean, that's on us. So that's my first answer. My second answer is knowing it's not transitory. The second answer is, and again, availability is a bigger issue than cost. So the second issue I would say is I think that we need to be cognizant as well that in general, our value add is around our services or our manufacturing, which mean that in general, I don't have an exact number, John, our cost of direct labor is under 10%. So this is an area that will, as a supplier, will continue to reprice the industrial world And we will continue. So we've seen sort of the heavy sledgehammer that hit in the second quarter related to inability to find people, inability to get people to work. As that levels out, knock on wood, a little bit, and it's really just about cost of labor, that I think we can manage. The system will reprice itself, and most manufacturing industrial companies have direct labor costs less than 10% of their products. So, you know, that part we can manage, and it's on us to manage it. But getting people to come to work is going to be a challenge, and we need to manage that ourselves. And obviously we hope, you know, as prices, as hourly wages go up, people will come into work. You know, we have some other drivers as well, but that's one of them.

Yeah, I think eventually it will be in the pricing, and it's going to be workforce, education, et cetera. But that's a good point. Ten percent is direct labor, so that seems to be manageable. Like you said, you're going to have to be agile and nimble how you pass through not only transitory but permanent price, you know, permanent cost increases.

Well, I think most business leaders in the industrial sector, if they could – snap their fingers to pay 25% more and make sure everybody showed up to work that had been trained, people would take that all day long, every day.

As operators, John, we can't believe the increase in costs is transitory. We've got to do things like automation, not only be able to put our production into low-cost areas, but also improve on reducing our labor costs through automation and different innovative ways on the plant floor.

Absolutely. Well, in closing, you've got your three silos right now, and it used to be when you were Tier 2 automotive, the events like this could be a cardiac arrest moment. But with the three silos, and you're in multiple industries right now, This could be a blip. It will be solved. That's what management does, and that's your work cut out for you, the balance of the year. So good luck with that, and I'm with you guys. Thank you.

Yeah, thanks. I appreciate that, Chad. Let me just, again, what I commented before, all this does is bring urgency, more urgency to the plan we've already had. We have tremendous liquidity, and we're going to execute it first and foremost on supporting our operations in, in resolving some of these issues through investment and automation, through investments in the restructuring. That's the first horse of the trough, as I like to say. So I appreciate your comments.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to Mr. Crawford for closing remarks.

Great. Well, thank you for your questions this morning. I hope you sense our frustration and our urgency. Remember, more so, I think, than many of the people you guys are invested in, you know, we are a management team that's highly invested in this company as well. So we are side by side, and we're going to resolve this, and this just brings to us a new level of urgency. So I appreciate your time today and your questions, and

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