Park-Ohio Holdings Corp.

Q3 2023 Earnings Conference Call

11/2/2023

spk05: Good morning and welcome to the Park Ohio third quarter 2023 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. The list of relevant risks and uncertainties may be found in the 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 operated income, and EBITDA as defined on a continuing operations 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 operated income, and net income attributable to Park Ohio common shareholders to EBITDA as defined, please refer to the company's earnings recent release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President, and CEO. Please proceed, Mr. Crawford.
spk03: Thank you very much and good morning to everybody. I want to start by going off script here a little bit and discuss how we view our results as compared to prior periods. As I've stated before, despite how demand volatility, supply chain challenges, inflation and labor have challenged our results over the last couple of years, our business model and our value proposition remain unchanged. This is why we often choose to compare ourselves to the financial record setting of 2018 and not 2022 as we do in this report. On that note, we're pleased to have achieved an all-time record revenue year to date in 2023 and expect, based on our forecast, to have a record-setting year for revenue in 2023. While we've not achieved the same in profitability metrics, it's important to note the third quarter EBITDA was nearing the record also set in 2018. Turning to the results, the third quarter showed strong revenue growth of 9%, as well as solid operating leverage in our gross margins and other profit results. Additionally, we're pleased to see significant free cash flow during the quarter, which we anticipate will extend through the end of the year and will continue to strengthen our balance sheet and strong liquidity position. Again, this quarter, diversity in end markets continues to be our strength. While revenue growth overall moderated from a blistering rate of 17% in the first half, all three business segments contributed to our improved performance during the third quarter. While the demand continues to be stable across the business, it's worth noting that aerospace and defense has become an increasing part of our growth profile. We also continue to benefit from commercial and pricing adjustments, which have been a priority this year as we grapple with inflation, especially as it relates to labor. In addition, as we conclude our restructuring of our operations during the last several years, we're now pursuing a more focused operating model which aims to increase productivity by allocating capital to our best products, services, and centers of excellence. While the UAW strike at some of our truck and auto customers will provide a headwind to our fourth quarter results, I am certain that we will end the year a much stronger, more focused, and disciplined company than we began the year and well-positioned to take advantage of important macro trends around industrial policy, infrastructure spending, and reshoring. With that, I'll turn it over to Pat.
spk00: Thank you, Matt, and good morning. Our third quarter results reflect continued strong sales growth year over year and significant profit improvement across all three of our business segments. Sales were at a near record level, gross margins were at their highest level in over five years, and operating income earnings per share in EBITDA were higher than both last quarter and the third quarter of last year. Our year over year sales growth in the quarter was driven by continued strong customer demand in each of our business segments. and increased product pricing. Sales growth was achieved in each business unit within our three business segments as we continue to benefit from our very diverse and global customer base. Our consolidated net sales from continuing operations were $419 million of 9% compared to $384 million in the third quarter of last year. And for the first nine months of this year, our sales were a record $1.3 billion. representing a 14% growth rate. We estimate that approximately half of our growth was volume driven and the remainder was driven by material and value-added price increases implemented across each business, which offset higher raw material, labor, and operational costs. In addition to the strong sales quarter, we also delivered sequential and year-over-year improvement in our gross margin. In the current quarter, our gross margin was 16.7%, which is an increase of 300 basis points, over 13.7% last year, and our highest gross margin percentage since the second quarter of 2018. SG&A expenses compared favorably to the second quarter levels and totaled $43 million in the third quarter, up approximately $6 million year over year. The increase compared to the prior year quarter was due to higher sales levels, increased personnel costs, and general inflation. As a percentage of sales, SG&E was 10.3% in the third quarter compared to 10.9% in the second quarter of this year. Consolidated operating income from continuing operations was $27 million compared to $11.6 million a year ago. On an adjusted basis, operating income was up 70% compared to the third quarter of last year and 16% sequentially compared to the second quarter. Our third quarter improvement in operating margins reflects the positive impact resulting from the plant consolidation actions completed in the prior periods, from customer price increases implemented, and from operational improvement initiatives across our businesses. Interest expense was $11.6 million in the quarter compared to $9 million a year ago. Of the $2.6 million year-over-year increase, $2.4 million was driven by higher interest rates with remainder due to higher average borrowings year over year. Our effective income tax in the quarter was 24%, which is in line with our expectations for the full year. Gap earnings per share from continuing operations for the quarter was 99 cents per diluted share, compared to 58 cents in the third quarter of last year. On an adjusted basis, diluted earnings per share was equal to our gap earnings of 99 cents, compared to 85 cents per share last year. an increase of 16%. On a sequential basis, compared to last quarter's $0.83 per share, our adjusted earnings per share was up 19%. Our EBITDA from continuing operations was $38.5 million in the third quarter, compared to approximately $30 million a year ago, an increase of 29% and improved 8% sequentially. This is our highest EBITDA level since the second quarter of 2018. On a year-to-date basis, EBITDA from continuing operations has increased 35% over last year. During the third quarter, we generated $23 million of operating cash flows and $17 million of free cash flow. During the first nine 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 strong free cash flow during the fourth quarter, and estimate our full year free cash flow to range between $20 and $25 million. Our liquidity continued to be strong at the end of the third quarter and totaled $175 million, which consisted of $51 million of cash on hand and $124 million of unused borrowing capacity under our various banking arrangements. In September, we amended our existing revolving credit facility to extend the scheduled maturity date. The amended facility, combined with free cash flow of $20 to $25 million expected this year, enhances our strong liquidity foundation to support our future growth strategy. Turning now to our segment results, supply technologies net sales were $193 million during the quarter, up 4% compared to $186 million a year ago. On a year-to-date basis, sales in this segment have grown 10%, to a record $586 million. Average daily sales in our supply chain business were up 6% year over year. The sales increase was driven by higher customer demand in most key end markets and realized customer price increases. During the quarter, the largest end market increases were heavy duty truck and bus, military and civilian aerospace, power sports, and industrial and agricultural equipment. The few end markets which defined year-over-year were again isolated in certain consumer-related end markets and in the semiconductor end market. In addition, our fastener manufacturing business continues to perform well and achieve continued strong sales in the quarter, driven by increasing global demand for our proprietary self-pierced and clinched products. Operating income in this segment totaled $15.6 million compared to $10.8 $7 million a year ago, an increase of 46%. Operating margins were up 230 basis points year over year to 8.1% in the current quarter, driven by the profit flow through from higher sales levels, customer price increases, and reduced operating costs. We remain focused on our initiatives to grow our higher margin industrial supply business and our proprietary self-piercing quench products in this segment. The integration of our prior year acquisitions has gone well, as both Southern Fasteners and Charter Automotive have exceeded our expectations and will position our industrial supply business and our SPAC products for future growth. In our assembly component segment, sales for the quarter were $108 million compared to $101 million a year ago, an increase of 7% year over year. Sales from each of our product categories, which include our rubber and plastic products, as well as our fuel-related products grew year over year, resulting from new business launched in the last year and increased customer pricing realized during the quarter. Segment operating income in the quarter increased significantly to $11 million compared to $3 million a year ago, and operating margins exceeded 10% in the quarter. On a year-to-date basis, adjusted operating income has improved $23 million year over year. The significant increase in margins has been driven by lower operating costs resulting from our plant consolidation efforts and other profit enhancement activities, including increased customer pricing. With respect to our aluminum business, which has historically been included in this segment, the sales process is ongoing. We continue to implement operational improvements and customer price increases which will positively impact future results. During the third quarter, the operating loss incurred in this business was approximately $1 million. We continue to believe that the automotive OEM's initiative around lightweighting, electrification, and the onshoring of certain products for key auto platforms will benefit this business over the long term. In our engineered product segment, sales in the third quarter were $118 million, up 21% compared to $97 million a year ago. driven by strong customer demand in both our capital equipment business and our forged and machined products business. In our capital equipment business, sales of new equipment and aftermarket parts and services were both higher year over year, resulting in a sales increase of 21% in this business compared to a year ago. Revenues increased again this quarter in every region, as our strong backlogs are being converted into sales. Bookings remained strong in the quarter and sold $44 million. And our backlog as of September 30th was $172 million, an increase of 6% compared to the end of last year. In our forged machine products business, sales in the quarter were up 22% driven by increasing customer demand in several key end markets, including rail and aerospace and defense. During the quarter, operating income in the segment was $7 million compared to $6 million a year ago. And on an adjusted basis, operating income was $7 million in each period, as the profit flow through from the higher sales was offset by lower operating margins in our forging business. Our capital equipment operating income margins were strong in the third quarter and were approximately 9%. And in our forging business, equipment downtime in the early part of the quarter and startup costs incurred on our newly installed forging line in our Camp Ohio facility impacted our results. On a year-to-date basis, sales in this segment were $354 million, an increase of 23% year-over-year, and adjusted operating income increased to $20 million, 15% higher than the prior year. We continue to win new business in this segment in support of the increased production of electrical steel used in battery technologies, and certain munitions used in defense and markets. This year, we have received over $50 million of new 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 2023 sales guidance, we are maintaining our sales growth range of 10 to 15% year over year. Our fourth quarter revenues will be negatively impacted by the United Auto Workers strike which affected several OEM customer plants. Although there appears to be tentative agreements between the OEMs and the UAW, it is difficult to estimate the full impact of the strikes on our fourth quarter revenues as production ramps back up to normal levels. Our current revenue levels from the OEM plants impacted by the strikes total approximately $25 to $30 million per month across our assembly components and supply technology segments. We continue to expect year-over-year improvement and adjusted operating income. EBITDA has defined free cash flow and adjusted earnings per share for the full year. Now I'll turn the call back over to Matt.
spk03: Great. Thank you very much, Pat. We'll now open the line for questions.
spk05: Thank you. We will now 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 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 pressing the star keys.
spk01: One moment please while we poll for your questions. Our first questions come from the line of Dave Storms with StoneGate Capital Markets. Please proceed with your questions. Dave, you may be on mute. Oh, there you go. I wasn't on mute. Good morning.
spk04: Good morning. Just wanted to kind of start. You mentioned in the call that your strong revenues was a product of half volume and half pricing. How do you see that going forward? Is there still room to push pricing, or do you think volumes are going to kind of be the driver through the remainder of 23 and into 24?
spk03: Yeah, that's a great question. We'd love to know the answer. No, that's a joke. There's no question that pricing during what's been a very challenging inflationary market in industrial space over the last couple years, migrating from supply chain issues to raw material issues to supply chain issues to now labor, has provided the opportunity for us to push pricing. It has been a strategic priority, as I mentioned, and one that has been an incredible amount of focus over the last couple years. Clearly, as inflation subdues, particularly in those first two areas, not so much in labor yet, the opportunity is lesser. So we have not entered our business planning process yet, so it's really difficult to comment really into next year. But I would say that our ability and our efforts around pricing will become less significant as we close out what has been a very challenging period with a lot of robust and difficult conversations. And they're not complete yet, and we're still dealing with inflation and labor. So I don't want to suggest it's over. I just think that the opportunities will get smaller and smaller moving forward, and we have to anticipate that we can manage the additional inflation. And if we can't, then that's a different issue.
spk04: Understood. Very helpful. And then just switching to cash flows for a second, it looks like you had a nice bump in cash flows in Q3. You know, obviously you have your stated goal of the $20 to $25 million for 2023. Kind of what levers do you expect to pull to close out the end of the year and hit those goals?
spk01: Dave, this is Pat.
spk00: You know, as I mentioned, we've said very aggressive working capital reduction targets in terms of the days of working capital to manage the business. The progress has been being made throughout the first three quarters, and we expect that to continue in the fourth quarter. So it's really driven off of reduced working capital. You know, the investments that we made in 2022 when supply chain restrictions required us to really carry more inventory, we're starting to see that reduce. And as you look at the sales growth that we've seen in the current year, we've invested very little in working capital, which is a tremendous achievement by our business units, and we expect that to continue in the fourth quarter. That's perfect.
spk04: Thank you for taking my questions.
spk03: I would just comment, and this is unrelated to your question, but as we think through our business, we do anticipate our business model, particularly around continuing operations, as a less capital-intensive business. So as we think about and I talk about in my comments about being a stronger, more focused business. That is part of the story, our ability to generate cash flow through the business cycle.
spk01: That's great clarification. Thank you.
spk05: Thank you. Our next questions come from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your questions.
spk06: Morning, everyone. This is actually Christian Zyla on for Steve Barter. Thank you for taking my questions.
spk00: Morning. First question.
spk06: Morning. First question, with your guidance held that implies about a 6% year-over-year growth rate in 4Q on a pretty nice 17% comp, during a time where customers and suppliers continue to talk about destocking and broad macro uncertainty, which end markets do you see that strength continuing? And are you hearing any slowdowns from your customers?
spk03: I'll give Pat a minute to answer that question. I try to beat the drum on diversity full time. There's no doubt that unit volume year over year has softened in terms of from a growth perspective. Our numbers and our forecasts incorporate some of the pricing work that I alluded to earlier. So, no, I think we agree. We've seen some of the units slow down that you mentioned. But, again, I think our diversity is strong, and I would highlight a couple different areas. One is I mentioned the rotation and, I guess, leadership, for lack of a better word, to aerospace and defense. Again, an important part of our business, not one we spend a lot of time on, but that is not slowing down. It's increasing. So, you know, that diversity continues, I think, to support The other thing I will mention is while, you know, supply technologies in particular is affected, I think, by consumption and demand rates at our customers on a daily, weekly, monthly basis, we also have an equipment business and a forging business that have backlogs that extend, in some cases, beyond 2024. So, you know, this is our diversity at play.
spk00: Pat, does that give you a... Yeah, I mean, Matt touched on... and the topics that will show increases in revenue year over year in the fourth quarter, but we have tremendous backlogs right now in our engineered product segment and the diversity of our supply technologies segment that stretches beyond one particular part of it, whether it be bus and truck, aerospace, agricultural. We see strength year over year in each of those those markets, and Matt highlighted aerospace and defense where we expect that to continue to be strong for us. The last two years have been quite sluggish in that end market, so the increases are going to be seen not only on the commercial aerospace side, but on the defense side as well.
spk06: Great. Thanks for that, Clark. Moving to the UAW comments, just want to make sure I understand your comments. You quantified about $27 million in monthly revenues from the Detroit 3 automakers impacted by the strikes. How should we think about haircutting that? I guess, is a 20% haircut on those revenues fair, or are you shifting production from some of those products in the near term? Just trying to think about how we should haircut that.
spk03: So I'm going to let Pat gather his thoughts here for a second. Please understand that the UAW strikes have not only impacted, or strikes in general, organized labor strikes have not only impacted the big three. While that is the significant chunk of impact, there have been other labor disruptions in the marketplace. I might point one out, Mack Truck, who is still currently dealing with a strike. So, you know, I just want to point out this, in this environment, this is an ongoing, you know, thing that is happening in the industrial workplace is I think many of these unions are sort of the last people at the table relative to what the non-union workers have gotten, particularly on the direct labor side over the last several years. So we probably will see more of this is my guess, but this isn't just the big three for starters, particularly as we think about supply technologies who doesn't do as much auto. So I would just comment briefly on that risk and then turn it back over to Ben.
spk00: I would comment that the ability to forecast the impact of the strikes is very, very difficult. It's fluid. There's tentative agreements that have to be voted on. Ramping up each of our production sites based on volume demand, coming not only from the OEMs, but as Matt mentioned, the Tier 1s and Tier 2s, we'll start to see that come back throughout the month of November. My script included the monthly impact based on what we knew as of the end of October. And that's probably a good barometer. Obviously, as the production plants get back to work and volumes start to begin to get back to normal levels, $25 to $30 million a month will drop pretty significantly.
spk01: But it's unknown right now at this time how quickly that's going to happen.
spk06: Got it. That's helpful. Thank you for that clarity. And then I guess switching over to M&A. So Southern Fasteners seems to have been a really good value deal when you guys bought it. Are there other good value deals out there? And what does your pipeline look like? And what are you most interested in acquiring?
spk00: The pipeline has always been consistent. You know, the diversity of our business allows us to get a look at a number of strategic opportunities throughout the course of the year. We're careful with the capital allocation. Southern Fasteners was a tremendous acquisition that allowed us to expand our industrial supplies business. What we're seeing in the marketplace, credit markets are tightening. And as a result, valuation multiples are starting to drop. And so there could be more opportunities that come our way. We continue to look for strategic acquisitions that are accretive to our margins, not only our gross margins, but our operating income margins, and those businesses that we're able to grow at a faster pace than the current organic growth levels.
spk01: Great.
spk06: And just last one for me, I guess a follow-up on Fasteners or Southern Fasteners. Can you just remind us, how are Southern's margins relative to the overall ST segment? And then what are the opportunities that you guys think about for improving that in the long term? Thank you so much.
spk01: Sure.
spk00: Before we acquired Southern Fasteners, we had built up an industrial supply business within supply technologies, which is primarily an OEM production supply chain manager. The margins are higher than our segment margins would indicate in that space. Typically, those are MRO products or products used to fix equipment fasteners and other supplies used in the production plants that often are critical spares needed in the business that generate higher margins. I won't comment on the individual margins in that particular business for us, but they're higher than the traditional segment margins that you see.
spk03: I would also add to that that as we think about how to identify opportunities in supply tech, you know, our focus is going to be bringing value to our customers. We think that there are opportunities to do that which will be accretive and provide improved consolidated margins But our strategy, both internally and externally, is to continue to provide more value to our customers. But yeah, I think that there will continue to be opportunities to extend that product portfolio in a very accretive way.
spk01: If you think about it, the system's already set up, which is nice. That's great. Thanks again for the time. Thank you.
spk05: We have reached the end of our question and answer session. I would now like to turn the floor back over to Matthew Crawford for any closing comments.
spk02: Great.
spk03: Thank you all for your interest and your ownership in our company, and know that while times are still interesting and challenging in many ways, again, we have a more focused, disciplined business model here, and we're anxious to to take advantage of what we see as a very bright future in industrial space, both globally and particularly in the U.S. Thank you very much. Bye-bye.
spk05: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-