Park-Ohio Holdings Corp.

gentlemen thank you for standing by our conference will begin momentarily once again thank you for standing by our conference will begin momentarily Thank you. © transcript Emily Beynon We'll be right back. Thank you. Good morning and welcome to the Park Ohio fourth quarter and full year 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 or not measures 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 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.

Good morning, and thank you for joining our fourth quarter call. There are many challenges in the fourth quarter of 2021. But I want to begin by highlighting the continued momentum of our revenue growth. Despite significant demand volatility from our customers and the ongoing restructuring work within our business, our revenue was up 3% for the quarter and 11% for the year. More importantly, though, our revenue outlook will benefit from growing backlogs and new business activity in each of our three segments. In fact, we expect 2022 to provide record or near record revenue levels. These relatively strong fourth quarter revenues came at a steep expense and resulted in an adjusted loss of $13 million. This loss overshadows a tremendous amount of work which has been done over the last 18 months to increase profitability and lower our overall expense structure. Extraordinary costs related to premium freight, raw material inflation, and labor, as well as unpredictable customer production schedules, led to unreimbursed expenses and inefficiencies particularly during the reemergence of COVID. While these costs affected all of our businesses, the assembly products group accounted for the vast majority of these challenges. Reduced or erratic production schedules at customer assembly plants made managing operations efficiently extremely difficult and resulted in increased costs, especially related to premium freight. Additionally, the spike in aluminum and related raw material in our casting business and some of the labor challenges that were unique to our Midwest U.S. footprint in our casting business amplified these issues dramatically. We anticipate ongoing improvement in this segment as some incremental raw material pricing benefits the 2022 results and more normalized customer production levels occur as we move into mid-year. We also anticipate that more normalized production schedules will create sizable operating leverage due to the restructuring that has occurred in this segment. As a reminder, in this segment, we've reduced our manufacturing footprint over the last two years by approximately 20% and continue to see positive new business awards. Given the strong product portfolio related to lightweighting, electrification, and powertrain agnostic parts, we see this segment as providing meaningful contribution towards the end of 2022. We also anticipate the benefit of growing backlogs in engineered products. While supply chain challenges will provide some level of uncertainty to the timing of these revenues and earnings, we are pleased the robust order activity, especially in the new energy space. We will also benefit from improvements in some of our traditional end markets. Rail car builds, aerospace, and, of course, oil and gas investments have been weak on a sustained basis during this recovery, and we expect solid incremental improvements in each. We anticipate that these revenue improvements will provide significant operating leverage as Engineer Products has been undergoing significant restructuring during the last 18 months, which include the closure of multiple high-cost facilities and the expansion of one of our forging facilities. Despite the solid revenue outlook, we are reluctant to give earnings guidance due to the ongoing challenges in the global industrial market. While we anticipate there will be an important restocking cycle and underlying end market demand is strong, production schedules are particularly vulnerable even at the last minute due to some supply chain issues up and down the value chain. While we have some but limited direct exposure to Russia and the Ukraine, it is clear the war will only put more pressure on these challenges globally and may add some additional expense. Additionally, it's difficult to understand the full impact of inflation to end market and particularly consumer demand. Regardless, we expect 2022 to be a year where we benefit substantially from pricing initiatives, reduced manufacturing overheads, which will provide improved earnings under almost all scenarios. In short, we expect at a minimum to return to solid adjusted profitability. With that, I'll turn it over to Pat to review the quarter.

Thanks, Matt. Before I speak to the details of our fourth quarter results, I want to make a few comments about our full year 2021 results. Overall, our consolidated sales met our expectations, and customer demand continued to recover from 2020 levels, as revenues for the full year were up 11%. We expect strong in-market demand to continue throughout 2022. Our supply technology segment, which saw a full-year sales growth of 21% and a year-over-year operating income increase of $13 million, or 42%, continue to perform well in a difficult supply chain environment. Our capital equipment and forging backlogs increased in our engineered product segment at year end, and we expect increasing demand in the oil and gas, rail, and aerospace end markets this year. In our assembly component segment, volatility in demand, labor shortages, and commodity inflation continue to be challenging, most notably in our aluminum casting business. During the year, our losses in our aluminum business negatively impacted our full year adjusted EPS by approximately $1.38 per diluted share. Our ongoing restructuring efforts in our assembly components and engineered product segments, which have included several plant consolidations to reduce our fixed cost footprint, will help drive improved profitability in 2022. Now I'll review our fourth quarter results. Consolidated sales in the quarter were $370 million, up 3% compared to $360 million a year ago, with higher 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 impact of the semiconductor chip shortage, which has caused production volatility throughout our automotive customer base. Gap EPS for the quarter was a loss of $1.48, and adjusted EPS, which excludes one-time non-recurring items, was a loss of $1.08. On a GAAP basis, our fourth quarter operating loss was $16 million. On an adjusted basis, excluding the one-time items related primarily to restructuring, the gain on the sale of real estate, a goodwill impairment charge related to our aluminum business, and other one-time charges are adjusted operating loss was $9 million, of which $10 million related to our aluminum business. SG&A expenses in the quarter were $50 million compared to $38 million a year ago. The increase was driven by $4.3 million of one-time expenses in the 2021 fourth quarter and a return to more normalized levels. Interest expense totaled $7.7 million compared to $7.4 million a year ago. with the increase driven by higher average borrowings year over year. The income tax benefit in the fourth quarter of $2.8 million represented an effective rate of 13%, which is lower than the US statutory rate of 21%, as a result of higher taxable earnings in higher tax rate jurisdictions. Our liquidity continued to be strong, ending the year at $214 million. which consisted of $54 million of cash on hand and $160 million of unused borrowing capacity under our various banking arrangements, which included $11 million of suppressed availability. During the quarter, we sold our crop forage location for $20 million and recorded a gain on the sale of $14 million. We expect to complete the consolidation of this location into our Canton drop forage location during the year. which will drive higher future margins in this business. For the full year 2021, consolidated sales were $1.4 billion, an increase of 11% compared to 2020 levels. Each of our businesses, except the Forge and Machine Products Group, saw increased customer demand compared to a year ago, with the largest increase in our supply technology segment, which was up 21%. Our full year gap EPS was a loss of $2.07, and our adjusted EPS was a loss of $1.20. The loss in 2021 was due primarily to the operating losses in our aluminum castings and in our forged and machine products businesses, which more than offset strong performance in supply technologies and our capital equipment business. Turning now to our segment results, in supply technologies, net sales, were $153 million during the quarter, up 7% compared to $143 million a year ago. Average daily sales during the quarter were up 7% year over year. In the quarter, we saw strength in many key end markets, with the biggest increases in the semiconductor, heavy-duty truck, agricultural and industrial equipment, and civilian aerospace end markets. The civilian aerospace market was up 27% compared to the fourth quarter of last year. We continue to have success with our new business initiative centered around industrial supply and mid-market accounts. In 2021, new customers totaled over 600, including over 300 new customers in the fourth quarter in various products and end markets. Our initiative to focus on middle market customers and industrial supplies is contributing to our sales growth in this segment. Operating income in this segment totaled approximately $10 million in the current and prior quarter, and excluding one-time items, adjusted operating margins were consistent at 7.1% in each period. Operating income and margin were impacted by higher inbound domestic and ocean freight costs, as well as increasing product costs, which were offset through higher sales levels and favorable customer pricing initiatives. For the full year of 2021, net sales were $620 million, an increase of 21% compared to 2020 levels, driven by demand increases in virtually every key end market. The higher sales and customer pricing initiatives drove higher operating income and margin, which were up $13 million and 100 basis points, respectively. In our assembly component segment, sales for the quarter were 127 million compared to 132 million a year ago. Sales in the current quarter were again negatively affected by the ongoing semiconductor chip shortage. Weekly demand fluctuations and OEM plant shutdowns and delays impacted certain plant production schedules again this quarter. The fourth quarter operating loss of $18 million in this segment was driven by an operating loss of $10.6 million in our aluminum business and $5 million of one-time charges, primarily relating to our ongoing plant closure and consolidation activities. For the full year 2021, net sales in this segment were $483 million, an increase of 9% compared to a year ago, as sales levels rebounded from the pandemic-induced customer shutdowns which incurred in 2020. We expect continued sales growth in 2022 resulting from higher demand on previously launched products. The segment operating loss for the year was $26 million compared to operating income of $8 million in 2020. On an adjusted basis, segment operating loss in 2021 was $17 million compared to income of $12 million in 2020. Again, our losses in this segment were isolated in our aluminum business which had $19 million in operating losses on an adjusted basis. We are aggressively addressing the losses in this segment by negotiating and implementing price increases across all product lines, moving production to low-cost facilities, finalizing planned consolidations, automating production in high labor areas, and exiting non-profitable products. We expect these actions to substantially reduce the segment's operating losses in 2022. In our engineered product segment, fourth quarter sales were $90 million compared to $86 million a year ago, an increase of 5%. In our capital equipment business, sales were up 8% compared to a year ago, and we're at their highest level since the pandemic began in the first quarter of 2020. Bookings and backlogs in this business are up significantly compared to a year ago. Bookings of new capital equipment totaled more than $36 million in the fourth quarter, an increase of 23% compared to last year. Our capital equipment backlog at December 31st, 2021, was $164 million, an increase of more than 20% compared to a year ago. Our strengthening performance in our capital equipment business was partially offset by the results in our forage and machine products business, where sales continue to be impacted by weak end market demand from several key end markets, including oil and gas, rail, and commercial and military aerospace. During the quarter, the segment's operating losses were due to one-time expenses totaling $11 million of charges for various plant restructuring initiatives. Also, as I mentioned earlier, we sold real estate for cash proceeds of $20 million and recorded a gain on the sale of $14 million. For the full year of 2021, sales were $336 million compared to $345 million in 2020. The decrease was due to lower customer demand for our forged and machined products. Adjusted operating income excluding the $13 million of restructuring charges was $1 million in 2021 compared to $6 million a year ago. During the quarter, the strong profitability in our capital equipment business was more than offset by operating losses in our forged and machine products business, which were concentrated in two manufacturing operations. We have implemented significant changes in these two operations, including leadership changes, customer price increases, and headcount reductions. As a result, we expect the results in the forging business to significantly improve in 2022. And finally, corporate expenses totaled $7 million during the quarter, compared to $6.4 million a year ago. On a full year basis, our corporate costs totaled approximately $26 million in both 2021 and 2020. Looking ahead to 2022, we are forecasting strong revenue growth of approximately 15% over 2021 levels, which would be at record levels. 2022 sales will be driven by strong customer demand in each segment. The revenue growth is expected in most end markets in supply technologies, increased volumes from several new products previously launched in assembly components, and from the strength of our backlogs in our capital equipment and forged and machined products businesses. Although we expect significant improvement in profitability in 2022, resulting in positive net income for the year, We will not provide further guidance at this time due to the supply chain headwinds, inflationary pressures, and labor challenges which we expect to continue during the year. Now I'll turn the call back over to Matt.