Park-Ohio Holdings Corp.

Good morning and welcome to the PARCC Ohio fourth quarter and full year 2023 results conference call. At this time, all participants are on 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 on 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 operating income, and EBITDA as defined on a continuing operations or consolidated basis. These metrics are not measures of performance or generally accepted accounting principles. For a 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 will now turn the conference over to your host, Mr. Matthew Crawford, Chairman, President, and CEO. Please proceed, Mr. Crawford.

Good morning. Thank you, Rob. Appreciate the intro. Welcome to our 2023 fourth quarter and annual conference call. To fully appreciate the recent collective effort of our Park Ohio team, it's worth appreciating the more than 30% or almost $400 million of revenue growth in the last two years, which has set all-time records across our diverse portfolio and in the aggregate. This was done with little impact from acquisitions. The hard work was complemented by the strong brands and customer relationships, which have been built up over years and even decades due to innovation, solid operating performance, and customer satisfaction. was committed to metabolizing this rapid growth as we also completed our restructuring and enhanced our focus on improved operating execution and on our key financial metrics. Thank you to our customers and to our entire team. In line with our areas of focus, critical achievements also included a 230 basis point increase in our gross profit and operating cash flows of more than $50 million, which was used to pay down debt and grow our business. 2024 is off to a fast start with what we believe to be a simpler and less capital intensive business model. While we believe that we're entering a slower revenue growth environment, we anticipate ongoing pockets of relative strength in our diverse set of end markets. In particular, aerospace, defense, and those industries which are beneficiaries of government investments like semiconductor, infrastructure, and green energy. In addition, we have strong backlogs heading into 2024, particularly in our IEG group. Perhaps more importantly, we're laser focused on continuous improvement. Given the amount of restructuring and growth over the last two years, we need to continue to work aggressively to optimize our execution and reduce costs. Our allocation of capital will focus heavily on these initiatives, as well as on organic growth opportunities in our best businesses. Creating operating leverage in our best assets, continuing to grow gross margins, and generating additional cash flow to deleverage our company are all of the greatest strategic importance during 2024. Thank you. I'll turn it over to Pat to cover the details of the results.

Thanks, Matt. We are pleased with our 2023 full-year results, which met our expectations and believe we have built momentum to deliver improved results in 2024. We were able to deliver strong year-over-year results despite the impact of the United Auto Workers strike, which affected our fourth quarter results and reduced sales by approximately $25 million and earnings per share by approximately 20 cents per share. The major highlights during the year were as follows. First, we achieved record consolidated net sales from continuing operations of $1.7 billion. We also achieved record sales in each business sector. Our gap earnings per share from continuing operations increased significantly compared to 2022 and adjusted EPS increased 74%. Our full year gross margins were up 230 basis points and EBITDA as defined improved 33%. We also delivered strong operating cash flows of $53 million during the year and free cash flow of $25 million. As a result, we paid down debt by $24 million and reduced our net debt leverage to 4.4 times, an improvement of 27% compared to a year ago. As we closed out the year, we completed the sale of our aluminum products business for approximately $50 million, which included $35 million of cash and $15 million of promissory notes, $10 million of which is contingent on certain new customer orders to be received by the end of 2024. Before I comment on our current year guidance in the acquisition of EMA GMBH, I'll review our full year and fourth quarter results in detail. Consolidated net sales from continuing operations in 2023 were a record $1.7 billion, up 11%, compared to $1.5 billion a year ago. Each of our business units experienced strong year-over-year sales growth, which was driven by most end markets and a broad range of customers. In our supply technology segment, strong demand across most of our diverse end markets New customer sales and increased demand related to new platforms utilizing our proprietary fastener products contributed to the segment's growth. In our assembly component segment, sales from each of our product categories, which include fluid-related systems, direct injection rail products, and molded and extruded rubber and plastic products, increased year over year from strong demand from key automotive and light truck OEM platforms, such as the GMC Yukon and the GM Silverado. Also contributing to the sales growth in this segment were newly developed products, including air conditioning hose products, which are now in production and from customer price increases realized at each of our manufacturing plants. The sales growth in our engineered product segment was in line with our expectations, considering the record equipment backlogs that existed at the end of 2022 and supplemented by new equipment bookings throughout the year. The booking trends continued to be robust throughout the year in both North America and in Europe and in all major induction heating and melting brands. Gap EPS for the year was $2.72 per diluted share, and adjusted earnings per share, which excludes primarily one-time expenses related to plant closure and consolidation activities, improved to $3.07 compared to adjusted EPS of $1.76 per share in 2022, a significant increase of 74% year-over-year. Gross margins improved 230 basis points year-over-year to 16.4% of net sales. The significant consolidation activities in recent years helped drive higher levels of absorption in many of our operating plants, which will continue to have a positive impact on our gross margins. Margin improvement continues to be the focus of our operating teams heading into 2024. SG&A expenses were higher in 2023 due primarily to the higher sales levels, higher employee-related costs, and general inflation. But as a percentage of net sales, SG&A was comparable year over year at 10.9%. Our adjusted operating income was $90 million compared to $48 million a year ago, an increase of 86% year over year. as we realized profit improvement in each business segment, with the largest gains in our supply technologies and assembly component segments, resulting from higher sales levels and improved customer pricing. Interest expense was $45 million compared to $34 million in 2022. The increase was primarily due to higher interest rates. Our full year 2023 income tax provision was $8.5 million on pre-tax income of $41.5 million, for an effective income tax of 21%, which is in line with the U.S. federal statutory tax rate. This year, we estimate that our effective tax rate will be in the range of 23 to 25%. Our EBITDA as defined was $134 million in 2023, an increase of 33% compared to $101 million in 2022. Operating cash flow generated during the year was $53 million, driven by strong operating cash flow of $29 million in the fourth quarter. Free cash flow was $25 million in 2023 compared to a negative free cash flow of $54 million last year. Moving now to our fourth quarter results, net sales from continuing operations of $389 million increased 2% year-over-year compared to $382 million in the prior year, driven primarily by higher demand in our engineered product segment, which was up 8%. As mentioned earlier, the UAW strike impacted our fourth quarter sales by approximately $25 million. Gap EPS and adjusted EPS for the quarter was 54 cents, which was affected by the impact of UAW strike by approximately 20 cents per share. Our adjusted EPS of 54 cents in the current quarter compared to a loss of 9 cents in the 2022 fourth quarter. In the quarter, operating income margins improved 70% compared to 2022, and we generated significant operating cash flows of $29 million and free cash flow of $22 million. EBITDA, as defined, was $29 million in the quarter, an increase of 12% year-over-year. Turning now to our segment results, in supply technologies, net sales for the full year were a record $763 million, up 7% compared to $712 million in 2022. The increase was driven by higher customer demand across most end markets in our supply chain business, with the biggest increases in power sports, heavy-duty truck, and commercial aerospace. In 2023, we saw a meaningful rebound in demand from commercial aerospace customers, which was up 26% over the prior year. Sales in this segment were also favorably impacted by increased demand for our proprietary fastener products, as sales in that part of the segment were up 16% year over year. Operating income in this segment totals $59 million in 2023, up 29% compared to $46 million in the prior year, and operating margins were 130 basis points higher year over year at 7.7%. These increases were driven by the higher sales levels and the impact of profit improvement initiatives, which included increased product pricing, which helped offset higher product and operating costs. In the fourth quarter, net sales were down 2% to $178 million compared to $181 million in the fourth quarter of 2022. The decrease was a result of the UAW strike at one truck assembly plant and slightly lower demand from certain end markets. Despite the lower sales year-over-year, operating income was up 36% year-over-year to $14 million. In our assembly component segment, sales were $428 million for the year, up 10% compared to $389 million in 2022, resulting from increased net price realization and increased volumes on new programs previously launched. Excluding charges related to plant consolidation activities, Adjusted operating income was $35 million in 2023, up significantly compared to $7 million a year ago, with the improvement driven by the higher sales levels, customer price increases, and benefits from plant consolidations completed in prior years. These positive factors more than offset ongoing product inflation and other increased costs. The over-year margins in this segment were up 750 basis points. In the fourth quarter, net sales of $97 million were up 3% compared to $95 million in the fourth quarter of last year, and adjusted operating income improved $5 million year-over-year to $7 million compared to $2 million a year ago. In our engineered product segment, full-year sales were $469 million, up 19% compared to $393 million in 2022, driven by strong customer demand in both our capital equipment and forged and machine products businesses. Bookings of new equipment for the full year were $175 million, and equipment backlog as of the end of December of 2023 was $162 million compared to similar levels a year ago. The strong backlogs drove a 21% increase in our capital equipment business during the year. In addition, revenues from our higher margin aftermarket parts and service business grew 18% year-over-year. In our forged and machined products business, full-year sales increased almost 16% and at their highest level since 2019, driven by strength in several key end markets, including aerospace and defense. We continue to quote new projects in support of the defense industry, which has increased the production of certain munitions utilizing our forging press technology. Excluding charges related primarily to plant consolidation activities, our adjusted operating income in this segment for the year was $24 million compared to $23 million a year ago. The improvement was driven by the higher sales levels, implemented operational improvements, and the benefits from plant consolidation actions, all of which more than offset lower margins than our forage and machine products business. In the fourth quarter, net sales of $115 million were up 8%. compared to $106 million in the fourth quarter of last year, and adjusted operating income was $4 million in the quarter, compared to $6 million a year ago. And finally, corporate-related expenses were $28 million in 2023, compared to $31 million a year ago, with the decrease driven by lower professional fees. Now I'll make a few comments related to our guidance for 2024. As indicated in our press release, we expect revenue growth to be in the mid-single-digit range year-over-year, driven by stable demand expected in most end markets. We also expect year-over-year improvement in EPS and EBITDAs defined. In our supply technology segment, we expect demand from most end markets to be stable from a unit demand standpoint and expect increased year-over-demand in the aerospace and semiconductor end markets, which should more than offset slightly lower demand in other end markets, primarily in heavy-duty truck. We also expect continued normalization of global supply chains and commodity prices this year. We will continue to focus on margin improvement initiatives, which will include footprint optimization, reducing product costs, and working capital reductions. In assembly components, customer demand is also expected to be stable across all products. Our team is focused on operational improvement initiatives, including increasing our rubber mixing capacity, increasing throughput on all of our production lines, and other value drivers, all aimed at increasing gross margins. In engineered products, we expect year-over-year growth in both capital equipment and forge-to-machine products. We begin the year with strong backlogs in each region. Key operating initiatives in 2024 will include increasing our marketing efforts in our global aftermarket business, impacting each of our equipment brands, capitalizing on market trends around electrification, defense and infrastructure spending, and the implementation of operational improvements in our forged and machined products business. On February 29th, we completed the acquisition of EMA Induction GmbH, headquartered in Meckesheim, Germany, for approximately $14 million net of cash acquired. EMA is a leading manufacturer of induction heating equipment and high-efficiency power converters and operates through its two locations in Germany and China. We expect EMA to generate revenues of approximately $30 million over the next 12 months and will be accretive to our current segment margins and earnings per share. We also expect meaningful cost synergies and longer-term market synergies as we create EMA into our business. HEMA strengthens our global induction heating expertise in Germany and throughout Europe and adds a global and well-respected brand to our product portfolio. Now I'll turn the call back over to Matt. Great. Thank you very much, Pat.