Park-Ohio Holdings Corp.

Good morning and welcome to the PARCC Ohio third 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 Legation 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 are not measures of performance under generally accepted accounting principles. For a reconciliation of EPS to adjusted EPS and for a reconciliation of net income attributable to Park Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President, and CEO. Please proceed, Mr. Crawford.

Thank you very much and good morning. Just a few comments before I turn it over to Pat to talk about the details. Despite significant challenges, most of our business continues to perform well. Supply technologies have seen a return to pre-pandemic levels in terms of revenue and profitability. This is despite ongoing challenges in supply chain as it relates to delivery and cost. New business activity is on track for close to $30 million this year. It is also worth noting that These improved market conditions have benefited most of our customers, including many of our small and midsize accounts. We continue to benefit from our broad diversity in this business from a geographic, product, and end market perspective. I also want to highlight the recent addition of Brian Norris as President of Supply Technologies. Brian brings considerable experience and commercial leadership to our team. Engineer Products and our industrial equipment business in particular is seeing a significant uptick in bookings. While this business is traditionally a late cycle business, it is clear that we're seeing a resurgence in industrial capital spending driven by traditional industries and some newer markets like alternative energy that are growing rapidly. We anticipate strong revenue as we enter 2022, and we'll need to focus on execution to track towards historical margin performance. The Forge Group, which has also included an engineered product segment, is beginning to benefit from improved spending in energy, aerospace, and rail, which have all lagged the general recovery. Returning to our challenges in automotive, we're beginning to make progress addressing the daily variances in the business. Operating efficiencies have been negatively affected by availability of labor and the cost and waste related with high turnover. We're accelerating our restructuring and shifting workload where possible within our footprint. We're also investing in process improvements as well. It is important to note that these operational variances are mostly related to two of our facilities. We're also challenged by the incredible spike in raw materials. While in many cases we have a mechanism to retrieve some of these increases automatically, the dramatic spike has disproportionately impacted our current results. We will continue to address these increased costs through improved efficiencies and pricing and expect significant near-term impact. Most importantly, our results should not mask the repositioning of our business for growth and improve profitability as we look into 2022. During 2020 and year-to-date 2021, we've spent over $15 million in restructuring, which will improve our expense profile and reduce our underabsorbed overhead. Also, year-to-date 2021, we have spent approximately $10 million on CapEx aimed specifically on cost savings and business optimizations. All of these investments target less than a two-year return at their worst. So, while these results are disappointing, we believe they are highly localized within our business And while visibility is still very low, at the moment, we see significant improvements as we enter 2022. With that, I'll turn it over to Pat.

Thank you, Matt, and good morning. Our results in the third quarter reflect continued strength in our supply technology segment and improving performance in our engineered product segment. In our assembly component segment, the ongoing automotive OEM production challenges, raw material price inflation, and higher labor costs have affected our quarterly results and continue to be a challenge for this business segment. Overall, our consolidated net sales of $359 million in the quarter were up 5% compared to a year ago, with improved year-over-year sales occurring in our supply technologies and engineered product segments. Sales in our assembly component segment were lower year-over-year as a result of the continued supply chain challenges, which have caused production volatility throughout our OEM and Tier 1 automotive customer base. Gap EPS for the quarter was a loss of 60 cents, and adjusted EPS, which excludes primarily plant closure and consolidation costs, was a loss of 32 cents. Our operating loss in the quarter, which was approximately the same as our second quarter operating loss, continues to be a result of the semiconductor chip shortage which caused low OEM production levels on certain auto platforms, primarily affecting our assembly component segment. We estimate the impact on our consolidated net sales in the quarter was $15 million, resulting in an EPS impact of approximately $0.34 per share. In addition, labor inefficiencies caused by labor shortages and significant raw material increases, primarily aluminum and rubber compounds, impacted our results by an estimated 49 cents per share. SG&A expenses in the quarter were $45 million compared to $39 million a year ago. Our current quarter SG&A expenses were at a more normal level versus a year ago when SG&A levels were significantly reduced during the pandemic shutdowns. Interest expense totaled $7.6 million compared to $7.4 million a year ago, the increase driven by higher average borrowings during the quarter to fund higher inventory levels. The income tax benefit in the quarter of $2.8 million represented an effective tax rate of 27%, which is higher than the U.S. statutory rate of 21%, due primarily to state and local taxes. For the full year 2021, we estimate an effective tax rate of 26 to 29%. Our liquidity continues to be strong and total $218 million as of September 30th compared to $243 million a year ago and $220 million last quarter and consisted of $60 million of cash on hand and $158 million of unused borrowing capacity under our various borrowing arrangements. During the first nine months of the year, net cash used by operating activities was $26 million, primarily to fund higher inventory levels caused by supply chain constraints and increasing customer demand. During the third quarter, our inventory levels increased $24 million in support of customer demand levels and continued long supplier lead times caused by freight carrier delays. In addition, Higher raw material and inbound freight costs also affected our inventory levels. We estimate we are carrying approximately $30 million of incremental inventory as a result of the global supply chain challenges as of September 30th. Capital expenditures during the quarter were $11 million, primarily in our assembly component segment for growth and margin enhancement projects. We continue to estimate our full year 2021 capex will be in the range of $28 to $32 million. Turning now to our segment results, in supply technologies, net sales were $154 million during the quarter, compared to $155 million in the second quarter and $132 million a year ago. Average daily sales during the quarter were similar to second quarter levels and up 20% year over year. In the quarter, we saw strength in most end markets, most notably in the heavy-duty truck, semiconductor, and agricultural industrial equipment end markets. In addition, demand in our civilian aerospace market was up nearly 10% from last quarter and 36% compared to a year ago. We continue to have success with our new business initiatives centered around industrial supply and mid-market accounts. Year-to-date, new customers total over 150,000 including over 30 new customers in the third quarter in various products and end markets. Operating income in this segment totaled $10.7 million in the quarter, and operating income margin was 6.9%, up 30 basis points compared to last quarter. Operating income and margin were both impacted by higher inbound domestic and ocean freight costs, including expedited freight caused by global supply chain constraints. We expect the ongoing global supply chain challenges to continue to impact our customer demand for the remainder of this year. So far this year, our active price management strategy has minimized the margin impact of increasing product and freight costs. We expect our team will stay ahead of these issues and continue to work with our diverse customer base and supply chains to minimize any future margin impacts. In our assembly component segment, Sales were $120 million compared to $110 million in the second quarter and $127 million a year ago. Sales in the current quarter were again negatively affected by the ongoing chip shortage, which resulted in lower sales and operating income in this segment of approximately $13 million and $5 million, respectively. Weekly demand fluctuations and OEM plant shutdowns and delays impacted certain plant production schedules again this quarter. We expect the microchip shortage will most likely remain a challenge for our OEM customers throughout the fourth quarter and into 2022. Although it is difficult to project the full year impact at this time, we estimate that the sales impact in the fourth quarter will be similar to third quarter levels. The third quarter operating loss of $8.9 million in this segment continues to be driven by several factors. First, supply chain disruptions continue to impact automotive production on certain key platforms, primarily in two of our aluminum plants, causing extreme fluctuations in production and significantly higher plant operating costs. Second, rising raw material prices in our aluminum and rubber products businesses impacted our profitability. In our aluminum business alone, raw material prices have increased 55 percent since the beginning of the year and 20% during the quarter. And finally, increased labor costs caused by local labor shortages is a challenge for many of our plants. Our third quarter results were impacted by increased wages, training and recruiting costs, production inefficiencies, and higher scrap levels resulting from these labor shortages. Also during the quarter, we incurred $1.8 million of one-time charges related to plant restructuring, closure, and consolidation activities. In response to the supply chain challenges and higher raw material and labor costs in this segment, we have relocated production to lower cost facilities with open capacity, automated certain manufacturing processes, and implemented and will continue to implement customer price increases. In our engineered product segment, sales were $84 million compared to $86 million in the second quarter and $81 million a year ago. In our capital equipment business, Sales were up 10% compared to a year ago, and operating margins were at their highest level in recent years, driven by strong aftermarket sales and lower operating costs. Bookings of new capital equipment totaled more than $60 million in the third quarter, an increase of 40% compared to last quarter, and almost three times new equipment bookings in the third quarter of 2020. Our improving performance in our capital equipment business was partially offset by the results in our forged and machine products business, where sales continue to be impacted by low demand from several key end markets, including oil and gas, commercial and military aerospace, and rail. In addition to the strong bookings in our industrial equipment business in recent quarters, our backlogs in our forged and machine products business are also improving and expected to continue to increase as we close out the year. During the quarter, this segment had adjusted operating income of $1.2 million, excluding the $600,000 of charges for plant closure and consolidation. This was an improvement of last quarter's adjusted operating loss of $100,000. And finally, corporate expenses totaled $7.4 million during the quarter, compared to $6.8 million last quarter and $7.6 million a year ago. On a year-to-date basis, corporate costs total $19.4 million in 2021, compared to $19.7 million in the 2020 period. With respect to our previously communicated 2021 financial outlook, we expect year-over-year organic sales growth to be within the range of 10% to 12%, and capital expenditures to be in the range of $28 to $32 million. We expect EBITDA margins as defined to approximate 5% for the full year, and we expect to use up to $25 million to $30 million in free cash flow for the year. Now I'll turn the call back over to Matt.