Q1 2024 Park Ohio Holdings Corp Earnings Call

Participants

Matthew Crawford; Chairman of the Board, President, Chief Executive Officer; Park Ohio Holdings Corp

Patrick Fogarty; Chief Financial Officer, Vice President; Park Ohio Holdings Corp

Dave Storms; Analyst; Stonegate Capital Markets Inc.

Christian Zyla; Analyst; KeyBanc Capital Markets Inc.

Yilma Abebe; Analyst; JPMorgan

Presentation

Operator

Good morning and welcome to the Park-Ohio First Quarter 2024 Results Conference Call. (Operator Instructions) 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 2023 10 K, which was filed on March sixth, 2024 with the SEC. Additionally, the company may discuss adjusted EBITDA, 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 a reconciliation of EPS to adjusted EPS, operating income to adjusted operating income and net income attributable 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. Agrusti.
Great.

Matthew Crawford

Thank you very much, and welcome to the first quarter of 2024 conference call. Thank you for joining. We're pleased with the performance of our company during the quarter, especially as it relates to our improved margins and our continued focus on managing improved cash flows. As most of you know, we've spent most of the last several years driving initiatives that would improve the quality of earnings across the businesses. These include commercial activity regarding pricing, pricing and exec, exiting low or negative margin business. The restructuring of several high-cost location renewed focus on growing our highest margin products and services and the sale of non-core assets. During the first quarter, we began to see a clearer picture of the momentum of those efforts and are producing are are proceeding towards a leaner, less capital-intensive and more predictable business. I particularly want to acknowledge the efforts of Supply Technologies. Supply Tech has led the way as an agile supplier to many of the world's most demanding and often volatile industries and customers while driving continuous improvement improvement improvement initiatives deeper into the organization and investing aggressively in new productivity tools and both data intelligence and operating execution. Additionally, the innovative ideas in the faster manufacturing group continue to bring important value driven solutions to an increasing set of global customers, particularly in the EV space. Acg's relentless focus on operations after several years of consolidations, which are now substantially complete, have not only created more improved and consistent performance, but allow us to quote new business and new products from a position of lower cost and world-class execution.
Our product portfolio is diverse and in many cases, agnostic to the powertrain of the vehicle. EPG. continues to benefit from strong backlogs and a growing and impressive aftermarket and service business precipitated by a massive installed base globally and trusted brands in the industrial space. We're striving to improve execution in the new equipment business where we've seen substantial turnover in key knowledge areas and expect improvements as we head into the latter part of the year. I remind us all that this group should and will be a leader in accretion to our consolidated margins for the balance of the year, we anticipate improved year over year comparisons and annual growth in line with our guidance. Stable demand generally combined with strong aerospace and defense volumes, plus solid backlogs in the long-cycle businesses support that assumption. Additionally, we believe macro trends and renewed spending in infrastructure, EV and semiconductor will play a larger role in our success towards the latter part of the year.
With that, I'll turn it over to Pat to cover the quarter results.

Patrick Fogarty

Thank you that our first quarter results were a positive start to the year.
Our revenues were in line with our projections and operating income, earnings per share and EBITDA exceeded our internal expectations. Sales in the quarter totaled $418 million and customer demand continued to be strong and most key end markets. The strong end market demand, along with operational improvements drove the strong performance during the quarter. Our consolidated gross margin was 17.1% in the quarter, up 120 basis points from the first quarter of last year. This is the highest level of gross margin in over five years. Also our adjusted EPS of $0.85 per share was up 18% compared to $0.72 a year ago. And EBITDA As Defined improved 19% year over year.
Consolidated operating income improved 19% to 24 million compared to 20.2 million in the first quarter of last year. And operating income margins improved 90 basis points year over year to 5.7% of net sales. Strong first quarter operating income performance was driven by record profit performance in Supply Technologies and operating income improvement in Assembly Components. Sg&a expenses were 47 million compared to 45 million a year ago, with the increase driven by an increase in personnel costs. Interest costs increased to 11.9 million during the quarter compared to 10.7 million last year, driven by higher interest rates in the current year, partially offset by lower average borrowings outstanding in the quarter. Our effective tax rate was 25% in the quarter. Foreign tax credits and research and development credits helped to offset the impact of higher foreign tax rates. We expect our full year effective tax rate to range between 23% and 25%. Gaap earnings per share from continued operations for the quarter improved 36%, the $0.83 per diluted share compared to $0.61 last year. On an adjusted basis, our earnings per share was $0.85 compared to $0.72 a year ago, an increase of 18%. Our EBITDA As Defined totaled 38 million in the first quarter. On a trailing 12 month basis, our EBITDA as defined was 141 million, resulting in improved leverage ratios compared to year-end. During the quarter, we generated improved year-over-year operating cash flows and free cash flow. We continue to implement working capital initiatives, which will drive improved free cash flow for the remainder of the year.
Our liquidity at the end of the first quarter was 168 million, which consisted of approximately 62 million of cash on hand and $1.6 million of unused borrowing capacity under our various banking range. As we previously announced, S&P Global upgraded our credit ratings during the quarter due to our improved operating performance and reduced financial leverage. Also during the quarter, we announced the acquisition of EVA GmbH. Siemens strengthens our global induction heating expertise throughout Europe and expands both our portfolio of induction equipment brands in our aftermarket service capabilities. We have commenced the integration of Lima into our existing operations in Germany, and we expect the MS annual revenues to exceed $30 million and the results to be accretive to our operating margins and our earnings per share.
Turning now to our segment results and Supply Technologies. Net sales were 187 million during the quarter, up slightly from a year ago, reflecting continued strong demand in most key end markets and led by a 28% increase in our aerospace and defense business and strong growth in our industrial supply business during the quarter, demand was lower year over year in the heavy duty truck from Home and Garden and agricultural equipment markets, which partially offset this growth.
We also achieved record sales in our fastener manufacturing business, which dropped 15% from a year ago due to strong customer demand for our proprietary products throughout North America and Europe. Operating income in this segment totaled a record 19.5 million compared to 14 million a year ago. Operating margins were also a record at 9.9%, up 270 basis points from 7.2% a year ago. The higher profitability in the quarter was driven by an increase in sales from higher margin products, lower operating costs in our supply chain business and sales growth in ours and our proprietary fastener business, our focus on reducing product costs, location profit improvement initiatives and expanding our higher-margin industrial supply and proprietary fastener products impacted the first quarter and will continue to positively affect future margin in our Assembly Components segment. Sales for the quarter continued to be strong across all product categories and totaled $107 million compared to sales of 110 million a year ago, with the decline primarily due to lower unit volumes in our fuel rail and extruded rubber products businesses. Despite the lower sales levels, segment operating income increased 18% to $8.6 million from 7.3 million a year ago. Segment margins were also higher in the current year at 8% compared to 6.6% last year, an increase of 140 basis points. Improved improvement in profitability was driven by ongoing profit improvement initiatives, improved product pricing and the benefit from completed plant consolidation in this segment, we continue to focus on improving operational execution in each of our manufacturing plants and are implementing other profit improvement actions, including expanding our rubber mixing capacity and increasing plant floor automation, which will positively impact our operating margin.
In our Engineered Products segment, demand continued to be strong across most product brands and geographies.
First quarter sales were 114 million compared to 117 million a year ago.
A slight decline in sales was driven by lower sales of new equipment, primarily in the US and in Europe. During the quarter, our aftermarket revenue increased 16% year over year. New equipment bookings totaled approximately 40 million in the quarter compared to average quarterly bookings of 43 million in 2023. Backlogs continued to be strong in this segment and totaled 151 million compared to 162 million last quarter. Revenue revenues in our forged and Machine Products business also improved and increased 4% year over year during the quarter. Operating income in this segment was $3.5 million compared to 5 million a year ago. And on an adjusted basis, operating income was 3.8 million in the quarter compared to 7 million last year. Profitability decline year over year in this segment was driven by lower new equipment sales in our induction business, lower sales volumes, isolated in our forging operation in Arkansas and higher operating costs to complete new equipment. And we are taking aggressive actions to improve profitability in this segment, including implementing initiatives to improve supply chain challenges experienced during the quarter and to improve the production throughput on new equipment orders.
And finally, corporate expenses totaled $7.6 million during the quarter compared to 6.9 million a year ago, driven by higher personnel costs.
With respect to our full year 2024 guidance, we continue to expect year-over-year revenue growth in the mid-single digit range.
We also continue to expect year-over-year improvement in adjusted earnings per share and EBITDA as defined.
Now I'll turn the call back over to Matt.

Matthew Crawford

Thanks, Pat. Appreciate to have a look at the first quarter and now we'll open the line up for questions.

Question and Answer Session

Operator

(Operator Instructions) Thank you. Dave Storms, Stonegate.

Dave Storms

More than or less on just hoping to do that. I'm sorry, it looks like Supply Tech really was the flag there for everything that could go right for you guys. How easy or challenging will it be to match some of those process improvements onto Assembly Components and engineered products. See the same results there.

Matthew Crawford

Yes, I am. It's not uncommon, Dave. I know you've looked at the business over a number of years. And I often say a great industrial holding company is full of great industrial businesses. And we have a number of great industrial businesses underneath the hood, each of them sort of have their own particular business cycle. So having some volatility between the Group and having different leadership profiles is not uncommon to us. And you're absolutely right, Supply Tech up both on the manufacturing and the distribution side. It has really performed well for us, the better part of a couple of years here. So I used the word agile in my comments, purposefully because it seems like every month there's a different challenge. But again, I think we're on a sustainable path there. As I mentioned, ACG. I think is on a really good place relative to the stability of their business and we invested heavily and the restructuring of that business. We've put ourselves in a great position from an operating excellence standpoint. It reflects itself in productivity on our operating efficiencies, and we've, I think put ourselves in a great spot there. So I think the tale of the tape. There is on new business on area of tremendous focus now that we have this this operating model that we believe is best in class. So that will play out and I think we'll see accretion there as we as we build that business or continue to build that business going forward.
So I think from an operational perspective, my point is we map to use your word on a lot of the success that we hope to bring to the business on after a difficult couple of years. And now it's about building it on Engineered Products, again, often historically has been the leader in the business has had its own set of challenges on a related to a few different things. One is some consolidations there where we consolidated businesses, which can be a challenge. That business is relies heavily on know-how and knowledge, some of which we lost during the changeover. So again, the business principles there around unique assets, strong aftermarket business and tremendous brands in the new equipment space, particularly in electrification, industrial electrification as well as products that are heavy in aerospace and defense markets. Their backlogs are there?
I think it's a huge award word. Again, mapping over some of the operational excellence that we've begun to see in the first two units is just taken a little more time than we thought.

Dave Storms

Understood.
That's very helpful. Thank you. On when you mentioned a little bit and your sponsor that you're working on, you're obviously new businesses and almost a suite. What does that sales cycle look like is, you know, now that we're in a more normal world than we were a couple of years ago is the contact to contract cycle trending shorter? And any gotten any insight you could give us that would be very helpful.

Matthew Crawford

Yes. I think there's I mean, there's two types of at least two conscious tickets to really three types of new business in the automotive space.
On the OE side, I think one is replacement business. I think we're extremely well positioned on key programs to achieve replacement business given where we are in terms of productivity, scrap rates and all the things that drive the performance of an automobile automotive supplier on. So I like where we are there. I think there's new business in the space that we participate in extrusion molding, et cetera. And again, I think we're particularly well suited there given the consolidation and the productivity improvements we've made over the last couple of years. So I think, again, I think we're those are sort of two of the areas.
I think we're primed for success in the near term.
I think that the third is launching new products, and that's a little longer cycle. So those first two, but I see us being impactful, if not later this year, certainly into 25 and 26 on developing new products and launching them them typically to be material could take a couple of more years. So no, but the bottom line is we expect that we didn't just start this new business cycle, particularly not in categories one and two, but I would anticipate us to outperform on car builds beginning in 2025 in terms of growth.

Dave Storms

That's very helpful.
Thank you for taking my questions and good luck in future.

Matthew Crawford

Thanks to.
Thank you.

Operator

Steve Barger, KeyBanc Capital Markets.

Christian Zyla

Morning, everyone. It's actually Christian Zyla for Steve morning.
Interesting real.
So your gross margin this quarter looks to be the highest since 3Q 16.
Very impressive. Can you just walk us through what enabled that was that due to pricing in your portfolio or more on the material cost side?
And do you think this is a sustainable new level?

Patrick Fogarty

Christian, this is Pat.
As I mentioned in the script, Supply Tech really led to the operating income performance during the quarter. As a result of a higher level of sales in higher margin products.
I mentioned aerospace and defense increased year over year significantly. I mentioned the growth in our industrial products business which typically carries higher margins. So overall mix was a big factor in the increase. In addition, the growth that we saw in our proprietary fastener products, which we expect to continue a really nice margin relative to the products that they are implementing around the world relative to EV and other applications that use our self piercing and clinch products. So there was a lot that impacted Q1 mix obviously has a lot to do with it, but we are very pleased with where margins have been and a lot of heavy lifting went on over the last two years around pricing with customers around reducing product costs. And those initiatives will continue as we continue to drive our operating margins in that segment.
In the automotive segment.
We saw a nice improvement year over year in our operating income.
And you know, a lot of that has to do with the consolidations that were completed.
As Matt mentioned, and in the early part of the completion of those consolidations, there are additional costs, start-up costs, training costs, inefficiencies that occur on the plant floor that we're getting over now. And we're starting to see those improvements occur and throughput increase, which obviously helps drive an increase in our operating margin.
Matt mentioned our power or engineered products group and some of the challenges that we faced.
We expect margins to continue to improve. Still a number of initiatives are in place. We did see nice improvement in our forging plant in Canton, which historically has been a higher margin business. We see a lot of new growth opportunities in our in our capital equipment business as it relates to forging equipment, which carries a higher margin so we're pleased with where we're at at 17.1% overall. And I'm hoping to be able to continue that as we get through the rest of the year.

Matthew Crawford

Chris, I would only add there's two layers of improvement, both inside some of the businesses, particularly Supply Tech and on the consolidated gross margins, one is a structural shift and to higher margin businesses. I mean, we're trying to give the businesses that have the highest margins, their unfair share of capital, and that includes not only investing in the right places in this particular case, we're benefiting from seeds. We planted in aerospace and defense.
It's two, three, four, five years ago.
So that's how the payoff. It also includes exiting low margin businesses where we don't provide a value set that we can get paid for. So I think there's a significant amount of sort of structural work here. There's no question Supply Tech performed at a very strong level. So I think that are our focus, particularly in auto on continuous improvement is continuing to benefit us. So again, we're going to see market leadership inside our business from different businesses at different times, unquestionably. And right now, the certainly the leader was in Supply Tech comm. But we believe at the end of the day, we're building a more stable, simpler, sustainable business model and less capital intensive. So I hope that helps Great job.

Christian Zyla

Very helpful. I guess just sticking with supply tech and I know part of this is the improvements you guys have made over the last few years and part of it was mix, but just how much of the margin expansion outside of that low 7% range was mix driven and should we expect that to continue or a step-down for the balance of the year? Just trying to think of the model here?

Patrick Fogarty

Christian, I would say most of the improvement, north of say 70% was a result of mix on. But on the other hand, as we get through the rest of the quarter, we've got initiatives to continue to reduce our product costs, which will help offset the change in mix going forward. So and I'd like to believe we can continue that 9.9% operating income margin. But anything that takes us north of 8%. We'll we'll generate a nice comparison year over year, but we're going to continue to drive towards a margin that looks closer to 10%.
We're I mean we're again, we're trying to grow our best parts of our business from a quality of earnings standpoint more quickly, again, aerospace and defense is a good good example.
Yes, in the quarter that gave us great mix, maybe maybe optimal mix on, but so it is a tough comp. There's no question if that's your if that's your point. It is having said that, we've made changes that again, we think we've taken the business to a higher level.

Christian Zyla

Great.
And then just switching gears to Engineered Products, I know in the past you've said as engineered goes, Park-Ohio goes. But as we look at the business, I mean, is there business line in EP. that's a drag on margins. And as you look at the entire engine, your portfolio, is there any way to structurally improve the business for you guys?

Matthew Crawford

We recently did with the assembly components.
I think we need to break the business apart a little bit to think about that number one, we have made a tremendous amount of decisions over the last few years trying to improve our business for the long term. I think the most well-known example is the consolidation of crop forge into Canton. Maybe a lesser known example is the expansion of software steel processing with the second for John. Some of these decisions were made with the long term health and interest of the business in mind, and I think they were made at the right time. Again, these are businesses where centers of excellence are access to trained labor. These are the kinds of decisions that build the business long term. Having said that, these are very difficult operating decisions and consolidation decisions at a time where, you know, turnover was much higher than usual retirements and loss of knowledge, much higher than usual. So I think of benefiting from those decisions where we signed have sort of worked that through in the automotive business over a couple of years. These are these are more challenging on opportunities. Having said that, these are some of our most stable customers and products. And these are businesses that that tend to be very unique assets and capabilities. So we're not losing business. The backlogs are strong and we need to perform against them.
And separately, when I think about the equipment business where we added E more recently, the aftermarket business, as I mentioned, is a bright spot and continues to be a bright spot. And the macro trends around defense and aerospace and infrastructure will benefit that business as well as the forge business in an outsized way so we continue, I think, to be a premier supplier of these products in a world that's electrified. So having said all that on the new equipment part of the business as I mentioned in my comments, it's difficult right now, again for some of the same reasons at the Forge, combined with the fact that the cycle time on some of these orders whether it be a forging press or an induction heater could be from order to ship or installation could be 18 months, 16 months, 14 months, it takes time to catch up it takes time to on Optimiz from both a pricing and an execution standpoint. So and we have strong conviction on the macro trends. We have strong convictions on the decisions we've made. And then we have strong conviction on the bones of the business from backlogs and installed base and aftermarket. It's just a smaller part of the business, but I've mentioned in a couple of areas, places where we consolidated or grew rapidly in forging or new equipment, which is been difficult and we'll continue to be and we're going to get better every day, but that's the nature of a diversified portfolio.

Christian Zyla

Great.
Really appreciate the answer. I've got one last one, and I'll pass back to them with the FY. 24 guide I know you guys added email, but does your M&A pipeline enable upside to your guidance? Or should we think about this year as primarily organic driven top line? And then in the quarter. Should we think about a couple of points of pricing and the difference being volume for the overall sales performance by CFO?

Matthew Crawford

I'll let Pat take the latter. I'll take the former, we tend not to build acquisitions into our model. So I think that that always has some upside to it. And we're not depending on future acquisitions to meet the goals we've laid in front of you hard stop on. So that is that is opportunistic. We've tended to do on Yelp Deals fairly often. So so I would not want you to leave the call thinking that we're not out there thinking what's going to be beneficial for our long-term success. We always are having said that, we're also tuned into managing our cash flow, managing our debt levels. And so we're trying to do trying to walk and chew gum at the same time, but to be clear, any acquisition that you would see us complete for the remainder of the year and should be accretive to our goals and should be something that you should be awfully excited about where we would be awfully excited about which means you, too.

Christian Zyla

Thank you.

Operator

Yilma Abebe, JPMorgan.

Yilma Abebe

Thank you, and good morning. I guess my first question is, I'm wondering, have you talked to you quite a bit about some of the operational improvements you put in place and across businesses over the last several years, op margins expanded quite nicely and in a flat revenue environment, I guess you win when revenue increases. How should we be thinking about the operating leverage in the business over the longer term, really what I'm trying to get at is what's the margin opportunity set and a higher revenue environment.

Patrick Fogarty

And this path of clearly, we focus on that, that flow through at a higher level of revenue. And we'd like to believe that that flow through relative to our operating income margins would be north of 15%. But we have such a wide range of products and plants. And so often that sometimes could be higher, sometimes can be lower. But in general, we expect a flow through of at least 15% in each of the businesses as revenues expand because our especially in our manufacturing businesses, where there's a high level of fixed costs, we've positioned ourselves nicely around the world in our manufacturing plants to have the capacity to grow revenues without growing the fixed cost makeup of the business. So that will enhance the flow through its revenues increase.

Yilma Abebe

Thank you. That's helpful. And then I guess maybe a follow-up to that, May, I guess as it relates to costs, I think I would think you talked about trying to make the business less capital intensive. You from a capital intensity perspective, are we thinking about more more more pure CapEx? Or would we expect to see lower working capital in the system and other other layers of cost so a are lower as we move forward here.

Patrick Fogarty

Clearly, on the CapEx side, we expect our capital to be spent in certain pockets of the business, especially where we're seeing growth for the current year, we expect to approximate $25 million in CapEx, which is compared to historic levels. Much less much of our capital being spent this year is on these growth opportunities and in technology up. But going forward, I would expect our CapEx to be lower than 25 million.
We continue to focus on reducing our working capital investment in each of our business and have initiatives to continue to pull inventory down, accelerate customer payments, manage our days to pay accordingly, which will help us drive an increase in our free cash flow this year from all of those things, you know, under the current model that we've built are less than historic levels of. So when you think about working capital and you think about supplier lead times over the last couple of years between freight issues and import issues and and supplier delay, expanding lead times, we had an embedded level of inventory that exceeded 50 million.
We haven't worked that all out of the system.
So we continue to work hard on bringing those lead times with suppliers down. So they're most efficient levels. We're trying to figure out ways to push inventory back to the suppliers, reduce our level of inventory that we carry. And all of those things will benefit our free cash flow going forward.

Yilma Abebe

Thank you very much.
That's all I had to pass it off until.
Thank you.

Operator

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 remarks.

Matthew Crawford

Great.
Thank you very much.
Thanks for your time and attention and investment in our company. Again, we look forward to a year of improving results and also a year of stable outlook. So we appreciate your time.
Thanks.

Operator

Thank you so much.
This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.