Park-Ohio Holdings Corp.

Good morning and welcome to the Park Ohio third quarter 2024 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 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 can be found in the earnings press release as well as in the company's 2023 10-K, which was filed on March 6, 2024 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 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.

Thank you, Kevin, and good morning to everyone. We appreciate you taking time this morning to join us. We are pleased with the performance during the third quarter, both in terms of the overall results and with the progress we continue to make in reshaping our company as a more nimble, more profitable, and faster growing enterprise through the business cycle. Specifically, I want to make three points. First, while overall demand was stable during the quarter, there were significant headwinds in numerous industrial markets. Pat will discuss some specifics, but the bottom line is that we're happy about our diverse global business in addition to new business initiatives that offset some of these challenges and allowed us to remain largely flat in revenue year over year. While we're not prepared to discuss the future too explicitly, we do believe that we will return to growth in the fourth quarter and are optimistic that many of our end markets that were down double-digit amounts and unit volume during 2024 will improve, and along with new business awards and historic backlogs in our equipment business, set us up for growth in 2025. Second, we continue to improve our overall margin profile, including a 60 basis point improvement in year over year gross margin. Our focus on execution and on investing in our best products and services will continue to bolster our margin improvements and make them more sustainable. In addition, These margin enhancements helped offset some of the demand weakness and limited the impact of any negative flow through. In the near term, we will continue to manage closely fluctuations in year-end demand, including a close eye on expenses and improve productivity initiatives, especially in our automotive and forging businesses. These adjustments will benefit us as we emerge into 2025. Third, we continue to use all tools available to us to reduce leverage. During the quarter, we sold roughly $25 million worth of common stock to support this initiative. These sales were led partially by myself and our family with a $4.5 million investment at $30 a share. We anticipate strong year-end operating cash flows and will continue to use stock sales opportunistically to help meet our debt reduction goals. Last but not least, I want to thank all of our Park Ohio team members. Our improving financial results are the result of taking care of our customers and all 6,000 plus of us committing to be a little better at our job each day. With this simple philosophy, we'll build a stronger business, not only for 2025, but for the next five to 10 years and beyond. Thank you, and I'll turn it over to Pat now to discuss the quarter.

Thank you, Matt. Our third quarter results were highlighted by year-over-year sales growth in two of our three business segments. and higher gross margins and adjusted earnings. Also, we repaid just over $23 million of debt, significantly increased our liquidity during the quarter. Consolidated net sales of $418 million were flat compared to $419 million a year ago. In spite of a challenging industrial environment, we saw consistent demand in many end markets in our supply chain business, continued growth in our proprietary fastener manufacturing business, and improved sales in our capital equipment and aftermarket business, which was offset by lower revenues in our assembly components and forging businesses. Our consolidated gross margin was 17.3% in the quarter of 60 basis points from 16.7% last year. On a year-to-date basis, our gross margin has increased 80 basis points to 17.1% compared to 16.3% a year ago. Year-over-year improvement was driven by the continued efforts to implement margin improvement initiatives across all businesses in addition to strong operational execution. On an adjusted basis, total consolidated operating income was $25 million, down slightly from $27 million last year and $26 million in the second quarter. SG&A expenses were approximately $48 million, representing 11% of net sales. compared to $43 million a year ago, with the increase driven by the SG&A expenses related to the acquisition of EMA induction completed in the first quarter and higher employee-related costs. Interest costs totaled $12.1 million during the quarter, compared to $11.6 million last year, with the increase driven by higher interest rates in the current year partially offset by lower borrowing. During the quarter, the income tax benefit on pre-tax income of $12.6 million was a result of recognizing certain discrete benefits related to federal R&D credits. We continue to implement tax planning initiatives, reduce our overall effective tax rate worldwide, and as a result, our current effective tax rate is expected to be approximately 15%. For the foreseeable future, we estimate that our core annual effective tax rate will be between 20% and 23%, reflecting the impact of these ongoing tax strategies. Our gap earnings per share of $1.02 was up 3% per quarter, and our adjusted earnings per share of $1.07 increased 8% compared to $0.99 a year ago. Year-to-date, our adjusted earnings per share of $2.94 was up 15%, compared to $2.55 in the same period last year. We generated EBITDA of $39 million in the quarter, which is in line with the third quarter a year ago. As a percentage of sales, our EBITDA margin was 9.2%. Year-to-date, our EBITDA has improved 10% over the same period a year ago, and we expect our full-year EBITDA as defined to be approximately $150 million, an increase of 12% over $134 million last year. During the quarter, we generated operating cash flows of $9 million, which was negatively affected by the timing of receivable collections in several of our businesses. We expect a meaningful reduction in working capital during the fourth quarter, and expect our fourth quarter free cash flow to be approximately $25 million. Also during the quarter, our liquidity increased 21% from the end of the second quarter, and totaled $194 million, which consisted of approximately $59 million of cash on hand and $135 million of unused borrowing capacity under our various banking arrangements. During the quarter, we raised cash of $25 million through the sale of Park Ohio common shares and used the majority of the proceeds to pay down $23 million of bank debt. Turning now to our segment results, Supply technologies generated net sales of $195 million in the third quarter compared to $193 million a year ago. Sales were higher year-over-year in several end markets, most notably in aerospace and defense, consumer electronics, electrical distribution, and medical equipment, which more than offset lower year-over-year sales in our heavy-duty truck and power sports end markets. In addition, sales in our manufacturing business grew 9% year over year as global demand for our proprietary products continues to be robust. Operating income was an all-time record in this segment, a total of $20.5 million, an increase of 31% year over year. Operating margins were 10.5%, also an all-time record, and improved 240 basis points from 8.1% a year ago. The higher profitability in the quarter was driven by an increase in sales of higher margin products, strong operational execution, lower operating costs in our supply chain business, and continued strong demand in our proprietary fastener business. On a year-to-date basis, sales in this segment were $594 million, and operating income was $59 million, both all-time records for the nine-month period. Segment operating margin was 9.9%. an increase of 220 basis points compared to last year. Our strategic focus in this segment continues to revolve around expanding operating margins, increasing sales in our industrial supply and aerospace and defense businesses, and expanding our proprietary fastener products into new applications, customers, and geographies. In our assembly component segment, sales were $99 million in the quarter compared to $108 million a year ago, and $103 million last quarter. The year-over-year decrease in sales was driven by lower unit volumes on end-of-life programs and lower product pricing on certain legacy programs, which partially offset the sales growth from other OEM platforms. On an adjusted basis, operating income in this segment totaled $6.6 million in the current quarter and was generally in line with $6.9 million last quarter with 6.7% operating margins in both periods. Compared to a year ago, profitability was down due to the lower product pricing on certain legacy programs and lower revenue on programs that ended last year. On a year-to-date basis, sales were $309 million in this segment compared to $331 million a year ago, and adjusted operating income margin was 7.2% compared to 8.6% a year ago. In this segment, we are focused on new business launches and continuous operational improvement. New business launches, which began during the third quarter, will incrementally add $50 million in revenue once full production levels are met, which we expect to occur by the middle of next year. We also continue to identify and implement product and plant for profit improvement initiatives in each of our manufacturing facilities, which will enhance operating margins in future periods. In our engineered product segment, sales were $124 million and increased 6% compared to $118 million a year ago, driven by higher demand in our industrial equipment business. It was up 19% year-over-year. The year-over-year sales increase occurred in most regions with notable strength throughout Europe, where revenues were up 32% year-over-year. In addition, revenue from aftermarket parts and services in North America We're up 19% from last year. New equipment backlogs continue to be strong, totaling $161 million compared to $162 million at the end of last year. During the quarter, operating income in this segment was $5.2 million compared to $7.1 million a year ago. The decrease in profitability year over year was driven by the lower sales levels and lower operating margins in our forged and machine products business. more than offset higher sales and improved profitability in our industrial equipment business. In the year-to-date period, sales in this segment were $365 million, an increase of 3% compared to last year. Adjusted operating income was $16 million compared to $20 million a year ago. Also, corporate expenses totaled $7.8 million during the quarter compared to $7.6 million last quarter. For the year-to-date period, corporate costs were $23 million in the current year compared to $22 million a year ago. And finally, with respect to our full year guidance, we now expect current year revenue growth between 1% and 2% and revenues to grow in the fourth quarter year over year. Overall, we believe most of our end markets will be stable for the rest of the year. In addition, we now expect adjusted earnings per share to increase more than 10% year-over-year, and EBITDA is defined to be approximately $150 million, an increase of 12% compared to last year. Now I'll turn the call back over to Matt. Great. Thank you very much, Pat.