Park-Ohio Holdings Corp.

Good morning, and welcome to the Park, Ohio, second quarter 2023 results conference call. At 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 today 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 company's earnings press release as well as in the company's 2022 10-K, which was filed on March 16, 2023, with the SEC. Additionally, the company may discuss adjusted EPS, adjusted operating income, and EBITDA, as defined, on a continuing operation or consolidated basis. These metrics are not measures of performance under generally accepted accounting principles. For reconciliation of EPS to adjusted EPS operating income to adjusted operating income and net income attributable to Park Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I'll now turn the conference over to Mr. Matthew Crawford, Chairman, President, and CEO. Please proceed, Mr. Crawford.

Good morning and welcome to our second quarter 2023 conference call. Pat Fogarty, our Chief Financial Officer, has joined me here this morning as usual. I want to touch on three things this morning before I turn the call over to Pat to discuss the details of the quarter. First, Park Ohio achieved record revenue in the recent quarter. This is an important milestone as we strive to meet our goal of $2 billion in annual revenue, but also makes important points about 2023. Our philosophy of building our business on long-term partnerships has benefited us meaningfully. Many of our key relationships date back decades, and I often repeat the story that one of our best relationships dates back to a highly engineered product we've been selling to a customer for almost 100 years. Servicing these customers has been difficult and expensive recently, but we emerge a stronger family of companies. Our record sales also are the result of tremendous effort in overcoming labor and supply chain challenges, which are stabilizing but still are requiring tremendous daily effort from our team to overcome. Thank you to those on our team who are rising to the challenge every day. Lastly, like all businesses, we have worked tirelessly to address the inflationary environment and want to thank many of our customers who have supported price increases when absolutely required. We appreciate your business and support and are here to help you succeed. Secondly, our recovery and gross margin to 16.4% or up 190 basis points is still below our long-term expectation expectations, but is a significant step forward. As discussed on every call recently, we have undergone significant restructuring beginning in 2019, which has affected every corner of our business and lowered our cost to serve our current customers, as well as positioning us to achieve our new business goals. Additionally, we're beginning to see the benefit of significant capex spent in recent years to support our most promising businesses. These opportunities for continuous improvement will continue to benefit our profits incrementally. Lastly, we have moved up our 2023 revenue guidance to an increase over 2022 of between 10% and 15%. That implies some deceleration from the first half, but still near record performance. The second half is buoyed by continuing but slowing customer restocking in some end markets, combined with backlogs remaining strong across much of the business and particularly in engineered products. In addition, new business opportunities continue to be robust. As mentioned on our prior call, we see these not only as short-term trends but also as promising long-term as our country invests in manufacturing both privately and through government stimulus. Ongoing recovery and growth in aerospace, defense, semiconductor, rail, advanced steel and EV, and energy both oil and gas and renewable, will lead the way in our important end markets for us. Now I'll turn the call over to Pat.

Thank you, Matt. Our second quarter results reflect continued improvement in sales, gross margins, and operating income, both year over year and sequentially across most parts of our business. Once again this quarter, we achieved record consolidated sales from continuing operations. Our sales in the quarter resulted from strong customer demand in each of our three business segments, increased product pricing, and the benefit of the sales from acquisitions made last year. Year-over-year sales growth was seen in each business unit within each of our three business segments across a very diverse global customer base. Our consolidated net sales from continuing operations were $428 million up 16% compared to $370 million in the second quarter of last year. And for the first half of this year, our sales have increased $124 million year over year, representing a 17% growth rate. We estimate that approximately 50% of our growth was volume-driven, and the remainder was driven by material and value-added price increases implemented across each business. Based on our record revenues in the first half of this year, continued strong backlogs across each business segment, and expected continued strong demand in most of our end markets throughout the second half of the year, we have increased our full-year sales growth outlook to 10 to 15%, up from our previous announced guidance of 5 to 10%. In addition to the strong sales quarter, we were pleased with our gross profit margins from continuing operations, which improved of 16.4%. up 190 basis points from 14.5% in the second quarter of last year. The 16.4% gross margin is our highest gross margin percentage since the fourth quarter of 2019. SG&A expenses were up $6 million year over year and similar to first quarter levels, primarily due to SG&A from our 2022 acquisitions, higher sales levels, and increased personnel costs. As a percentage of sales, SG&A was 10.9% compared to 11% in last year's quarter. Consolidated operating income from continuing operations was $19.2 million compared to $13.8 million a year ago. On an adjusted basis, which excludes restructuring and other one-time charges, operating income totaled $23.3 million and was up 77%. compared to the second quarter of last year, and 6% sequentially compared to the first quarter. Most notably, adjusted operating income margins in our industrial equipment business were approximately 10% in the second quarter, an improvement of 240 basis points compared to the first quarter. Also, adjusted operating margins in our supply chain business and assembly components businesses showed significant improvement compared to the first quarter, and we're up 70 basis points and 140 basis points respectively. Our second quarter improved operating margins reflect a positive impact from the restructuring and the consolidation actions taken in prior periods, from price actions implemented, and from operational improvement initiatives across our businesses. Interest expense was $11.1 million in the quarter compared to $7.6 million a year ago. Of the $3.5 million, A year-over-year increase, $2.9 million, was driven by higher interest rates, with the remainder due to higher average borrowings year-over-year. Income tax expense was $2.1 million in the quarter for an effective income tax rate of 24%. This is in line with our expectations for the full year 2023. Gap EPS from continuing operations for the quarter was $0.57 per diluted share. earned 52 cents in the second quarter of last year. On an adjusted basis, diluted earnings per share was 83 cents per share in the second quarter, compared to 49 cents per share last year, an increase of 69%. On a sequential basis, compared to last quarter's 72 cents per share, adjusted earnings per share was up 15%. Our EBITDA from continuing operations as defined was $35.7 million in the second quarter compared to $26.1 million a year ago, an increase of 37% and up 13% sequentially. On a year-to-date basis, EBITDA from continuing operations was $67 million, an increase of 42% compared to $47 million a year ago. During the second quarter, we generated approximately $1 million of operating cash flows up significantly from a use of $33 million in the second quarter of last year. On a year-to-date basis, our free cash flow was a use of $12 million. During the first six months of the year, we have made significant progress in reducing our net working capital days and are seeing the benefits across most of our businesses. As a result, we continue to expect free cash flow for the full year to be in the range of $30 to $40 million. Our liquidity continued to be strong at the end of the second quarter and totaled $169 million, which consisted of $53 million of cash on hand and $116 million of unused borrowing capacity under our various banking arrangements, which included $24 million of suppressed availability. Turning now to our segment results and supply technologies, net sales were a record, $197 million during the quarter of 12% compared to $176 million a year ago. On a year-to-date basis, sales in this segment have grown 14% to a record $393 million. Average daily sales in our supply chain business were up 11% year-over-year. The sales increase was driven by higher customer demand in most key end markets, customer price increases realized, and the sales from the acquisition of Southern Fastening. which was completed in August of last year. During the quarter, the largest end market increases were power sports, heavy duty truck, industrial and agricultural equipment, and civilian aerospace. The few end markets, which declined year over year, were isolated in certain consumer related end markets, which represent approximately 10% of segment revenues. In addition, our fastener manufacturing business continues to perform well had achieved sales growth of 20% over the second quarter of last year driven by higher customer demand for our proprietary self-piercing quench products, as well as last year's acquisition of Charter Automotive. Operating income in this segment totaled approximately $15.4 million compared to $12.7 million a year ago, an increase of 21%. Operating margins were up 60 basis points year over year, as the profit flow through from higher sales levels was partially offset by higher operating costs. Our focus on price action strategies and initiatives to grow our higher margin industrial supply business is reflected in our improved results in this segment. We expect this segment of our business to continue to perform well throughout the second half of the year, and strong demand will continue across a wide range of end markets and customers. Despite the strong demand expected for the rest of the year, we do expect the second half rate of growth to be lower than our first half growth levels, primarily due to customer plan shutdowns, which are typical during the second half of the year, and continued softness year over year in certain consumer-related end markets. In our assembly component segment, sales for the quarter were a record $112 million compared to $95 million a year ago, an increase of 17% year over year. Sales from each of our product categories, which include our molded and extruded rubber and plastic products, as well as our fuel-related products, grew significantly year over year and sequentially compared to the first quarter. As a result, the business launched in the last year and increased customer pricing realized during the quarter. Segment operating income increased significantly to $8.4 million in the second quarter compared to a loss of $1.4 million a year ago. On an adjusted basis, operating income was $9.6 million in the current year quarter. And on a year-to-date basis, operating income has improved $18 million year-over-year. The significant increase in margins year-over-year has been driven primarily by lower operating costs, resulting from our plant consolidation activities and increased customer pricing. With respect to our aluminum business, which has historically been included in this segment, the sales process is ongoing. During the second quarter, the net loss incurred from this business was $1.7 million net of tax, and EBITDA was a loss of $1.6 million in the quarter. We continue to believe the automotive OEM's initiatives around lightweighting, electrification, and on showing certain products for key auto platforms will benefit this business over the long term. Moving now to our engineered product segment, sales in the second quarter were a near record $119 million, up 20% compared to $99 million a year ago, driven by strong customer demand in both our capital equipment business and our forage to machine products business. In our capital equipment business, sales of new equipment and aftermarket parts and services were both up 27% compared to a year ago. Revenues increased again this quarter in every region as our strong backlogs are being converted into sales. Induction heating and melting bookings remained strong and totaled $51 million in the quarter compared to a quarterly average of $50 million last year and $52 million in the first quarter. Our backlog as of June 30th was $170 million, an increase of 4% compared to the end of last year. In our forage to machine products business, sales in the quarter were up 5% driven by increasing customer demand in several key end markets including rail and aerospace and defense, as well as from new business awarded over the past several quarters. During the quarter, operating income in this segment was $3.2 million compared to $7.1 million a year ago. On an adjusted basis, which excludes plant consolidation and other restructuring actions, operating income was $6.1 million compared to $7.9 million last year. The lower profitability in the second quarter was driven by operating losses in our forging business, which more than offset strong results in our capital equipment business. In the capital equipment business, as I mentioned, operating income margins were approximately 10%, and we're at the highest level since 2018 and 2019. In our forging business, equipment downtime and continued labor challenges impacted our results in the quarter. We have taken action to resolve the equipment downtime which occurred in our forging plant in Arkansas and are seeing improved labor efficiencies in our Canton, Ohio facility as sales ramp up as part of the integration of our crop forage business. On a year-to-date basis, sales in this segment were $236 million, an increase of 25% year-over-year, and adjusted operating income was $13 million compared to $10 million last year-to-date, and which reflects a 30% improvement in this segment year over year. We continue to quote new capital equipment opportunities and win new business to support the increased production of electrical steel used in battery technologies and certain munitions used in the defense end market. During the second quarter, we received over $50 million in induction-related and forging press equipment orders directly related to these market trends. and believe this part of our business will continue to benefit. And finally, with respect to our full-year sales guidance, we are increasing our sales growth outlook to 10% to 15%, driven by the current strong customer demand in each segment. We also continue to expect year-over-year improvement in adjusted operating income. EBITDA has defined free cash flow and adjusted EPS as a result of higher sales levels and improved operating margins in each segment. Now I'll turn the call back over to Matt.