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spk01: Good morning. Welcome to the PARCC Ohio Second Quarter 2022 Results Conference Call. 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 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 2021 10-K, which was filed on March 16, 2022, 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 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.
spk03: Good morning and thank you for joining our second quarter 2022 call today. As I mentioned in our press release last night, we're pleased with the revenue acceleration across the business. The broad nature of this growth and the contribution of new business, as well as the resurgence in markets that have been struggling until recently, most notably rail, aerospace, oil, and gas, which all showed improved results, bodes well for the balance of the year. Zooming out a bit, we see two additional positive signs on the horizon. First, we believe that most of our end markets will benefit from an improving supply chain environment over the next year or so as our customers seek to restock their inventories. We do not believe a deep recession is a base case for our end markets at this time. But regardless, any reduction in demand caused by the Fed tightening cycle should be offset by the restocking demand at some level. Secondly, we are watching with a close eye the federal government's legislation which targets businesses and infrastructure investments. While it's too early to foretell all the specifics, we may benefit in a variety of ways. A few include, first, increased investment in semiconductor production will benefit directly a number of our supply technology customers. Second, green energy and particularly electric cars, wind turbine energy, and the decarbonization of the industrial sector will also benefit most significantly our ACG and our engineer component segment. And three, broad investments in infrastructure related to rail, roads, bridges, and grid will touch a wide portion of our business. Despite this revenue momentum, earnings fall short of our consolidated expectations. Inflation, logistics, and labor challenges continue to be an everyday and continuing challenge for the business. Supply technologies whose active part numbers reach well over 100,000 SKUs has continued to leverage strong supplier relationships and a significant incremental investment, excuse me, a significant incremental inventory investment to battle these challenges and fulfill record customer demand. Our engineer products group has worked similarly hard to manage record backlogs and secure important materials to complete jobs. Assembly components has been the most affected due to unique challenges and volatility of the auto supply chain. We're addressing these challenges with significant restructuring, which will reflect a lower cost structure and increase pricing from our customers where inflation has impacted us most. Since many of these actions take three or four months to impact our profitability, we anticipate market improvement in the second half. Lastly, we're happy to have closed on two acquisitions recently. As most of you know, we have grown significantly over the years through deals and believe not only do these transactions fit the mold of our most successful, but also pay vigorous attention to where we see the most long-term opportunity for Park Ohio and will be accretive to our gross margin and our bottom line immediately. Thank you as well to all of our teammates.
spk02: These last couple years have been filled with challenges, and I appreciate the hard and smart work and the fruits of this effort. With that, I'll turn it over to Pat to cover the results.
spk00: Thank you, Matt. Before I review our second quarter results, I want to discuss the two strategic acquisitions for our supply technology segment, which were completed subsequent to June 30th. The first acquisition is Southern Fasteners, based in North Carolina, which supplies commercial fasteners and industrial supplies throughout the United States. Southern specializes in the design of customized inventory management programs, for its customers in several end markets. Southern is a great complement to our supply technologies business and will accelerate our industrial supply growth initiative, which is centered around delivering MRO products to our OEM customer base. The second acquisition is Charter Automotive, which is strategic to our fastener manufacturing business and its location in China. Charter is a manufacturer of auto components and will help accelerate the global growth of our proprietary self-piercing and clinch technology to our US OEM customer base in China and the growth of electric vehicle production throughout the region. The combined revenues of these acquisitions are approximately $40 million annually, and both will be immediately accretive to our operating margins and earnings per share. The combined purchase price is approximately $30 million and includes deferred payments that will be paid over two years. Now to our results for the quarter. Our second quarter results were highlighted by solid performance in both our supply technologies and engineered product segments, driven by strengthening end market demand, strong capital, equipment, and aftermarket backlogs, increased product pricing, and implemented operational improvements. For the second quarter in a row, we achieved record revenue levels in supply technologies and revenues in engineered products were at their highest level since the first quarter of 2020. Despite the positive results in supply technologies and engineered products, our results in our assembly component segment were negatively affected by restructuring charges during the quarter and ongoing increases in raw material costs. The one-time restructuring charges relate primarily to the downsizing of one of our aluminum plants and the completion of our plant consolidation of one of our fuel products facilities. Also, we have finalized price negotiations with several customers and are negotiating several other price increases in our fuel and rubber products businesses, which we expect to positively impact our segment results in the second half of the year. In the second quarter, our consolidated net sales were $429 million, up 22% compared to the second quarter of last year. Higher sales levels were driven by increasing customer demand across all three segments, and in most key end markets, improved product pricing and increased production in our industrial equipment business. Our gross margins in the quarter were 11.6% compared to 11.4% in the second quarter of last year. On an adjusted basis, our gross margins were 12.6% in the quarter, an improvement of 100 basis points compared to the second quarter of 2021. SG&A expenses were $45 million compared to $43 million a year ago, with the increase due to higher selling expenses from the higher sales levels and general inflation, which has impacted costs in each of our segments. As a percentage of net sales, SG&A expenses were down from 12.4% a year ago to 10.5%. During the second quarter, in connection with the consolidation of our pipe threading equipment operation, In our engineered product segment, we sold the related real estate for net proceeds of $4 million and recorded a gain on the sale of approximately $3 million, which is excluded from adjusted earnings per share. Interest expense totaled $8.3 million compared to $7.4 million a year ago, with the increase driven by higher average borrowings, driven by increases in working capital to support the higher sales levels. Our effective tax rate in the quarter was 32%, which included a discrete expense item, which caused a rate to be higher than the full year expected rate of approximately 25%. Gap EPS for the quarter was $0.08 per diluted share. Adjusted EPS, which excludes $5 million of one-time charges and the gain on the sale of the real estate, was $0.21 per share in the quarters. In addition, our results in the quarter were negatively impacted by currency fluctuations compared to a year ago, which in the aggregate reduced EPS by 5 cents per diluted share. During the quarter, we used operating cash flow of $28 million to fund higher working capital levels driven by the sales growth in each segment. We expect free cash flow to be positive in the second half of the year as net working capital days begin to decrease from current levels. EBITDA is defined more than doubled year over year and improved to $52 million year to date compared to $40 million a year ago. We continue to focus on increasing free cash flows in each of our business units and expect net debt balances to approximate current levels after considering the two completed acquisitions. CapEx in the quarter and the first half of the year totaled $8 million and $15.5 million respectively. we continue to expect full-year CapEx to be approximately $30 million. Our liquidity at the end of the second quarter was $200 million, which consisted of $61 million of cash on hand and $139 million of unused borrowing capacity under our various banking arrangements, which included $29 million of suppressed availability. During the second quarter, we increased our revolving credit facility to $405 million from $375 million, based on the strength of our current collateral base. Our outstanding borrowings under this agreement total $288 million as of June 30th. Turning now to our segment results, in supply technologies, net sales were a record $176 million, up 4% over the previous record set last quarter, and up 13% compared to last year's Second quarter sales, $155 million. Sales were strong across most of our end markets throughout the United States and Europe in spite of currency headwinds, which impacted sales by approximately $10 million in the second quarter. Average daily sales in our supply chain business increased 18% year-over-year, driving the overall segment sales record. During the quarter, we saw significant year-over-year sales growth with significant increases in heavy-duty truck, semiconductor, industrial and agricultural equipment, and civilian aerospace. In addition, our fastener manufacturing business continues to perform well and is seeing increasing sales and strong operating margins as customer acceptance of our proprietary self-piercing and clinch products continue to gain traction with the OEMs around the world. Operating income in this segment totaled approximately $12.7 million in the current quarter, an increase of $2.5 million year over year. Operating margins were 60 basis points higher than a year ago, driven by the profit flow through from the higher sales levels and successful customer pricing strategies as we continue to recover a high percentage of our increased inventory costs with customers in this segment. We expect continued strong sales in most key end markets throughout the second half of the year in spite of the ongoing supply chain challenges which may impact customer demand and production schedules. In our assembly component segment, sales for the quarter were $154 million compared to $110 million a year ago, an increase of 41% year-over-year. Sales in the current quarter were higher primarily due to increased volumes from new fuel-related business launched in 2021 and increased customer pricing, which included the pass-through of higher raw material and operating costs. The segment operating loss was $7.5 million in the second quarter compared to a loss of $6.1 million last year. On an adjusted basis, excluding the one-time charges related to the restructuring of certain plant operations in our aluminum and fuel products businesses, our adjusted operating loss in this current quarter was $3 million, an improvement from an adjusted loss of $5 million a year ago. Operating losses in this segment were a result of the ongoing negative impact of increasing raw material costs, primarily rubber compounds used in several products, as well as general inflation on most operating costs. For the remainder of the year, we expect to generate positive operating income in this segment, driven by agreed upon customer price increases, which take effect in the third quarter, and reduced operating costs resulting from our restructuring activities. In our engineered product segment, second quarter sales were $99 million, up 15% compared to $86 million a year ago, and at their highest level since the first quarter of 2020. In our capital equipment business, sales were up 11% compared to a year ago, as customer demand for our equipment continues to be robust. New equipment bookings in the first six months of this year totaled $122 million compared to $85 million in the first half of 2021, an increase of 44%. Equipment backlogs totaled $162 million at the end of June, compared to $121 million at the end of 2021. In our Forge to Machine Products business, sales in the quarter were also at their highest level since the first quarter of 2020, as several key end markets continued their recovery, including oil and gas, rail, and commercial and military aerospace. Sales were up 27% year over year, and we expect orders to continue to trend higher in the second half of the year. During the quarter, operating income in this segment was $7 million compared to an operating loss of $1 million a year ago. The profitability improvement year over year was driven by the higher sales levels, implemented operational improvements, and product pricing initiatives. We are clearly seeing the benefits from cost reduction actions taken in prior quarters. which includes the consolidation of our crop forage facility into our Canton drop forage operation and the significant operational improvements in our foraging plant in Arkansas. For the remainder of 2022, we expect continued year-over-year improvement in sales and operating income in this segment as we convert our strong capital equipment backlog into sales and from the recovery in certain key end markets in our forage and machine products businesses. And finally, corporate expenses totaled $7.5 million during the quarter compared to $6.8 million a year ago. The higher expenses in the current year were driven by higher personnel costs and incremental professional fees in the current period. And finally, with respect to our 2022 guidance, we continue to expect revenues to be at record levels for the full year, with year-over-year revenue growth of approximately 15%. In addition, we expect significant improvement in profitability for the full year 2022 compared to last year. And we also expect our third and fourth quarter adjusted net income to improve sequentially compared to the second quarter. Now I'll turn the call back over to Matt.
spk03: Great. Thank you, Pat. As you can see, we're excited about the short-term and long-term trends around revenue. Our earnings have been playing a little catch-up to that, but we like the trajectory and expect enhanced performance in the second half as some of the actions we've already taken start to yield some benefit. With that, we'll ask for questions.
spk01: Thank you. If you'd like to ask a question today, please press star 1 from your telephone keypad and the confirmation tone indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, it's star one.
spk02: Thank you.
spk01: Thank you. Our first question is from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your questions.
spk05: Thanks. Good morning, guys.
spk01: Good morning, Steve.
spk00: Good morning, Steve.
spk05: Matt, you brought up restocking in your prepared remarks. How real, or maybe better said, how broad do you think the restocking trend is based on what your customers are saying about what they need for parts over the next 6 to 12 months?
spk03: Great, Steve. Yeah, no, I think that we're beginning to see some broader news cycle on that issue. So broadly, I think that certainly... we've seen a pretty well documented discussion in the auto industry regarding what they expect in terms of restocking. So I think that that one is fairly well documented and understood. I think around the rest of the business, I think we continue to see very strong expectations from our customers in terms of their build rates going out through the rest of the year and even into early next year. um you know some of that of course is based on continuing expectations around demand but some of that is also related some of our key customers you don't have to do much besides drive by a dealer lot to notice that their lots are empty so whether it be specific information from customer build rates looking out through the rest of the year anecdotal evidence we see relative to inventories they're holding in auto and other industries i think we feel pretty confident that they're anxious to get some more product on their shelves, so to speak.
spk05: That's great. And it's really good to see a step up in engineered products margin. I know a lot of heavy industries you serve have big backlogs like rail car and aerospace. For the casting side specifically, since you consolidated that, how much operating leverage is in that business, or what does incremental margin look like as production picks up there?
spk03: Yeah, I would comment first. We do appreciate some of the traction in the equipment business in the engineer products group. I know that's not where your question went, but that has traditionally been our highest margin segment. Those that may be new to the company haven't seen that level of performance. We have put a tremendous amount of effort into restructuring there. It is not complete, but we're beginning to see the benefits of it. So I think that we're quite excited, I think, between the restructuring and the backlogs. We anticipate that to return to a margin leadership position. It's also an area where we have tremendous brand loyalty around our aftermarket services. That's one of the highest margin profile businesses throughout Park, Ohio. So no, I'm not surprised to see that take a leadership position. Clearly, that's been the business most affected by rail and aerospace and oil and gas. seeing some stabilization there will benefit it as well. So, you know, that is not a surprise to us, albeit we've been anxious to see it. And that is, we expect that to continue to show traction, not just this year, but going into next year as well. So, yeah, in terms of that. In terms of general aluminum, Pat, do you want to take on the incremental operating leverage question?
spk00: Sure. Steve, I would expect our flow through from all the restructuring that we've done to impact the business and put our operating income margins back to historic levels. Now, we don't expect to see that throughout the course of this year as the restructuring is being finalized, but as we move into next year, we would expect margins to get back to where they've been in the past. The pricing on raw material you know, affected this business more than any other segment of our business. We expected that. We're starting to see aluminum prices begin to come down and hopefully stabilize as we enter into 2023, which will be positive for this business. We've been able to negotiate price increases. That effort is never done. We continue to work with our customers to improve pricing not only on the aluminum casting side, but also on the fuel and the rubber product side. This process takes a lot longer than any of us would like, but we're working through, with each customer, improved pricing so we can get to the returns that we expect in this business, which is north of 8%. And that would get us back to historic levels.
spk05: Yeah, Matt, I know my question probably threw you off your game because I asked about engineered products and then I said castings. I actually meant forgings as you've consolidated crop into can and drop forge.
spk03: Yeah, sorry. Yeah, you had me going two different directions. That's why I asked Pat to answer it. Forgings, we've made a significant investment in that consolidation. And listen, there's a learning curve. I think that the Canton Drop Forge people are a center of excellence in these large forgings. That doesn't mean there's not going to be some learning relative to some of the parts we've transferred from Chicago down to Canton. So I think that investment is beginning to pay off, but we won't be in the meat, I think, of that return until probably mid-next year. The good news is their order book is exploding on their traditional business. So I think we're going to begin to see some real leadership from our forging business, particularly there, but also Arkansas Steel, which will be affected meaningfully by the increased rail car builds. So, no, I think we will see some nice momentum there over the next six to nine months, and then I think we'll begin to see significant operating leverage at Canton as they're able to onboard more people, execute against their backlogs, and really start to make the parts we've transferred from Chicago at a meaningfully profitable level.
spk00: One last point there is, in addition to the investment that we're making in the consolidation of crop in the Canton, we made a significant investment in a new hydraulic press line in Arkansas. The completion of that and the gearing up for production occurred recently. Right at the time the pandemic hit. And so we, we have suffered for two years without real volume to be, uh, to, to be on that line. And we're starting to see with rail orders, uh, and rail car build rates, uh, escalate. We're starting to see the benefit of that. And the big turnaround in, in that segment from a loss a year ago to $7 million in operating income this year is a huge turnaround. that takes into effect the work that's been done operationally as well as these new investments.
spk05: Yeah, and you must feel like you have a couple years of visibility on that line now, right?
spk03: I think that we have visibility to return to where we have been. I think we're still working through how and with which customers and product we're going to invest. you know, envision for the long-term excess capacity. We'd like to diversify the business from rail a little bit. We're looking at some other great partners. So in terms of what I view, if you recall, Steve, some of that investment was made to backstop some of the demand in the rail industry. I still think we have tremendous opportunity as we work down the backlog to find great long-term partnerships in the construction or ag industry that will really take us to levels we've never been.
spk05: Thanks. I'll get back in line.
spk01: Our next question is from the line of Yilma Abibi with JPMorgan. Please proceed with your questions.
spk04: Thank you. Good morning. Yilma, how are you? Good. Good. Thank you. My first question is on free cash flow. I believe you mentioned the backup of this year expects working capital to come down. Can you give us a little bit more color in terms of the key new drivers there? I'm trying to think about your sales growth and putting that in context of working capital investment needed to support that growth and the balance of this year.
spk00: This is Pat. Two things are going to drive free cash flow in the second half of the year. Obviously, the improvement in earnings and EBITDA will benefit free cash flow. Our days in working capital as I described in my script, are at higher levels than we have seen historically, primarily because of the elongated supplier lead times. We're carrying more inventory as a result of inventory that's on the boat coming over from Asia. Some of that we expect to scale back. We've carried more inventory in support of our customers' demand than we historically have. We're starting to bring those levels down, and we saw that happening in the month of June. Our working capital levels generally to our every sales dollar is about 24%. Some businesses a little higher, some a little less. But our drive for each of the business units is to get back to historical levels, which will obviously benefit our free cash flow. We expect that to start taking hold in the second half of the year, a little longer than what, quite frankly, I had hoped for, but we're starting to see that happen.
spk03: Yom, I would only add that we are expecting, I think, significant cash flows at the back of the year, which is fairly typical for the company, but recognize some of the business dynamics that are going on right now that may take a little longer to harvest than You know, one is in supply technologies, lead times on product from Asia can be, you know, six to even nine months. So, you know, some of the inventory we're taking on now to protect our customers and make sure that we're fulfilling at a rate that's acceptable to them, over 100,000 SKUs can be considerably difficult to manage six to nine months out. So I think we'll, you know, we'll have some play in those numbers and it will take a little longer to play out. Also, I think that supply chain challenges in the equipment business have been challenging as well. The backlog has grown to very high levels, principally because of business activity and the order book, but there's also a piece in there which is some of the challenges to get equipment out because we're waiting on components, etc. We're holding a little more inventory that we have purchase order for that we may not like, but we're going to have to do that to to manage our supply chain. So that may take a little longer than year-end, so we expect a really good year-end, but that's not really the whole story of the opportunity we have on the balance sheet.
spk04: Thank you. I guess maybe a quick follow-up on that. As we look forward to next year and more specifically on working capital, in the context of what you discussed in terms of supply chain issues and holding more inventory, How should we think about working capital trends as we go into next year, assuming the demand picture holds relatively in a constant to current levels?
spk00: I think that'll depend on the business unit and where demand shakes out for next year. But just to put it in context for you, for every five days of working capital, that equates to about $20 million. So if we have you know, $5 to $10 million of increased days of working capital, you know, we're saying that we have $30 million of excess working capital where volumes are today. So we believe that embedded working capital could come out of the system if sales remain constant as we head into 2023.
spk04: Thank you. And one final one. In terms of capital allocation and M&A and looking at, you know, leverage, and debt, how should we think about your M&A in a pipeline and incremental debt for acquisitions?
spk03: As you know, we have been traditionally very interested in growing by acquisition. I think that we have are still interested in that. I would say that we have been increasingly focused on organizing the business in a way that, number one, focuses on our best products and services in terms of both what success looks like over five to ten years and also, two, what provides sort of incrementally strong either operating leverage or gross margins to the business. I do think we're a little more selective, and that's why we haven't done as much over the last couple years. I think you will continue to see our appetite for those kinds of acquisitions that support initiatives inside each of the businesses. So we will continue to be selective. I think that you can expect we will continue to adhere to the principles that got us here, which is being thoughtful buyers. So I wouldn't suggest to you that we are not going to be active. We are, but I think we're going to continue to be more selective over the near horizon.
spk04: Thank you very much. That's all I had.
spk01: Thank you. At this time, we'll turn the floor back to the management team for closing remarks.
spk03: Great. Well, thank you very much for your time today. We appreciate your support and look forward to an exciting second half. Have a great day.
spk01: This concludes today's conference. May this connect your lines at this time. Thank you for your participation.
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