Q3 2020 Park Ohio Holdings Corp Earnings Call
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Good morning, and welcome to the Park Ohios third quarter 2020 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 a list of relevant risks and uncertainties may be found in the earnings press release as well as in the <unk>.
These 2019 10-K, which was filed on March 12, 2020 with the FCC.
Additionally, the company May discuss adjusted EPS and EBITDA as defined adjusted EPS and EBITDA as defined are not measures of performance under generally accepted accounting principles for a reconciliation of EPA excuse me of EPS to adjusted EPS and for a reconciliation of net income attributable to park, Ohio common shareholders to EBITDA as defined please refer to the.
Companys recent earnings release I.
I would now like to turn the conference over to Mr., Matthew Crawford Chairman CEO and President. Please proceed Mr. Crawford.
Thank you and good morning, welcome to Park Ohios third quarter 2020, <unk> Conference call Earnings Conference call I'm joined here. This morning, with Pat Fogarty, Our Chief Financial Officer.
Perclot experience a significant recovery in many of our end markets during the third quarter, resulting in an almost 50% increase in revenue should increase in revenue sequentially from the second quarter. Additionally, we achieved approximately 85% as compared to 2019 a market improvement of.
Well the equal importance is that we continue our journey to become a more focused business, which will enjoy improved operating leverage and higher overall quality of earnings.
To support this initiative, we continue to improve our long term competitiveness by done by identifying and executing on actions to meaningfully improve operating metrics and lower our cost structure.
Additionally, we are actively investing in products and services, which was which will be the backbone of the future business with higher returns on invested capital and growth throughout the business cycle.
Notably, we accomplish these goals, while generating $23 million of operating cash and an increased discipline around capex, both critical components and our efforts to operate at a lower level of financial leverage.
While these achievements are notable and I want to thank the entire team for their contributions during what continues to be a difficult time, we're doubling our efforts as we go into 2021 and expect to see ongoing momentum from these initiatives from 2021 and beyond.
In particular I want to highlight the efforts of supply technology.
Despite dealing with ongoing headwinds in a number of their key markets. They achieve operating margins, which were above pre cobot 2019 levels.
This work is a testament to the ongoing strategic effort within supply technologies to deliver superior customer service within an environment of continuous improvement, while also introducing new higher margin products and services.
As a company, we're cautiously optimistic about the remainder of the year and the beginning of 2021.
We're particularly excited about some of the new and in some cases delayed new business, which will help begin our track back to normalized business levels.
We believe we will start the year with the strongest foundation in recent memory.
But above all we endeavor to keep our teammates healthy and provide a safer workplace is possible.
With that I'll turn it over to Pat Fogarty.
Thanks, Matt during.
During the third quarter, we saw a strong recovery in many of our end markets third quarter consolidated revenues increased 49% sequentially versus the second quarter and represented approximately 5% of prior year sales sales in certain end markets, such as automotive semiconductor medical lawn and garden and power space.
George were in excess of 90% of prior year levels.
On the flip side other end markets, such as commercial and military aerospace oil and gas and rail have been slower to recover which is notably reflected in the results of our engineered products segment.
In addition to the solid revenue recovery during the quarter, we began to see the benefits of the permanent cost reductions implemented in each of our business segments.
This was evident in our supply technologies segment, where margins are up 130 basis points compared to last year's third quarter margins on lower sales levels.
We are confident that the actions taken in our business segments will continue to result in margin expansion as sales volumes continue to recover.
Our efforts to aggressively manage both working capital and capital spending yielded $23 million of operating cash flow and $18 million of free cash flow in the quarter we.
We utilized our free cash flow generated during the quarter to repay $18 million of outstanding indebtedness.
We ended the quarter with total liquidity of $243 million, an increase of 23% since June thirtyth.
The improvement in our liquidity is the result of improved business conditions and the efforts to manage working capital and cash flow since the beginning of the pandemic journey.
Turning now to the detailed results for the quarter consolidated sales were $340 million compared to $228 million in the second quarter and 403 million last year throughout the quarter. We saw a solid recovery from second quarter demand in the majority of our end markets. Our consolidated monthly sales have increased.
Every month since March in our September consolidated sales represented 93% of prior year sales.
On an adjusted basis, excluding charges for plant consolidation and related cost reduction actions consolidated gross margins in the third quarter were approximately 15% compared to approximately 16% a year ago.
Monthly gross margins continue to improve in most of our businesses and in the month of September at their highest level in 2020.
SGN expenses in the quarter were $39 million compared to 43 million a year ago, a decrease of 9% year over year, driven by cost reductions in labor selling costs, including reduced travel and professional fees.
During the third quarter operating income was $11 million compared to an operating loss of $21 million in the second quarter and operating income of $24 million a year ago.
Operating income in the current quarter include $1.8 million of charges related to our restructuring efforts.
Interest expense in the third quarter was $7.4 million compared $8.6 million a year ago. The decrease was due to lower interest rates and lower average borrowings outstanding in the current year as we used free cash flow to repay $18 million of indebtedness during the quarter.
Our effective tax rate in the third quarter was 5% this.
This rate is lower than the U.S statutory rate of 21% due primarily to the benefit of a carry back of US net operating losses allowed under the cares Act and the reduction of the estimated guilty tax impact, resulting from the final regulations.
Our third quarter GAAP earnings per share were 44 cents compared to 99 cents a year ago on an adjusted basis our EPS.
Yes was 52 cents in the third quarter compared to one dollar one a year ago and significantly up from the second quarter loss of $1.17.
As I mentioned earlier, our total liquidity increased 23% since June Thirtyth and has returned to levels seen prior to the pandemic.
We expect liquidity levels in the fourth quarter to approximate third quarter levels, which includes cash on hand of $51 million and $192 million of unused borrowing capacity under our various banking relationships.
We control the level of Capex in the quarter to $5.5 million and expect fourth quarter capex to approximate $10 million most of which will support new business previously awarded in our assembly components segment.
Now I'll discuss our individual segment results in the third quarter.
In supply technologies sales in the quarter increased 40% sequentially to $132 million compared to $149 million a year ago.
While year over year demand was lower in certain key end markets, such as commercial and military aerospace heavy duty truck and agricultural equipment, we experienced strong year over year demand in semiconductor medical and power sports end markets month.
Monthly daily sales in our supply chain business continued to improve throughout the quarter with September sales, reaching their highest level since January of this year.
Our fastener manufacturing business sales rebounded to prior year levels as demand for our proprietary self piercing and clinched products more than doubled second quarter levels, both domestically and in Asia.
Segment operating income was $10.6 million in the third quarter compared to $10 million, a year ago and up significantly from 300000 last quarter.
Segment operating margin increased 130 basis points to 8% from 6.7% a year ago. Despite lower sales levels as a result of implemented cost reductions and favorable sales mix.
We expect margin expansion to continue as volumes increase, especially in our commercial and military aerospace business and add locations servicing heavy duty truck and agriculture end markets, which have been slow to recover.
Moving to our assembly components segment sales of $127 million more than doubled second quarter sales and were 93% of sales from a year ago.
Sales have improved every month since the pandemic first impacted this segment in mid March.
During the quarter, we saw strong demand from the automotive Oems and tier one customers as production accelerated after an extended period of shutdown, which ended in late may.
The automotive end market was first to show strong recovery in the third quarter, especially in light truck and as UBI platforms.
Continued strong demand is expected in the fourth quarter as well as an increase in volumes and new business previously launched.
On an adjusted basis segment operating income was $8.1 million compared to an operating loss of 12.4 million in the second quarter and operating income of $10.6 million a year ago.
Our efforts to consolidate locations, which are largely completed reduce fixed overhead costs and invest in operational improvements will enhance our margins in future periods as volumes continue to improve.
We continue to believe we are well positioned to benefit from the trends in the global auto industry, which are aimed at producing vehicles to comply with more stringent global emission regulations, except for timing delays. The pandemic is not impacted those trends or our ability to develop and manufacture products to meet that demand we expect.
Note that these trends will increase our sales content per vehicle over the next several years.
In our engineered products segment sales in the third quarter were $81 million compared to $79 million in the second quarter and $119 million last year.
Each of our businesses in this segment have been have seen a slow recovery in our key end markets, including aerospace and defense oil and gas and rail.
The slower demand affected both our industrial equipment and forged machine products businesses.
And our capital equipment business, new equipment sales improved only 10% sequentially in aftermarket sales were flat to second quarter levels, New equipment order activity continues to be at historic low levels, especially in North America as customers continue to defer their capital spending into future periods.
We are optimistic that custard customer demand, we will begin a gradual recovery during the fourth quarter and continue into next year in both our industrial equipment group and our forged machine products.
Operating income in the segment was down from third quarter of 2019 from $10.3 million to $1.3 million driven by the lower sales levels, which resulted in several unabsorbed operations. Despite the decline year over year third quarter operating income improved 2.1 million sequentially from.
The second quarter due to ongoing cost reduction efforts by each business in this segment.
And finally corporate expenses were $7.6 million in the quarter compared to $6.9 million last year with the increase driven by personnel related costs that were reinstated during the quarter.
Overall, we are pleased with our improved results in the quarter, which reflected a solid recovery in most end markets. We firmly believe that the efforts to realign our operations to lower our fixed cost footprint will positively impact future margins although.
Although we recognize many of our businesses continued to be challenged by end market declines caused by the pandemic, we believe our businesses have stabilized.
And well positioned heading into 2021 with strong liquidity and financial flexibility.
Through the combination of new business initiatives completed cost reduction actions in a stronger recovery in certain end markets. We are confident there are goals of margin expansion and continued strong cash flows will be achieved now I will turn the call back over to Matt.
Great. Thank you Pat I will now open the line for questions.
Thank you, ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information total indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from Q4.
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Our first question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Hey, good morning, guys.
Thanks, Dave.
Matt in the 2020 is obviously been a tough year, but you and the team made quick decisions to deal with it can you just give some more specifics on key initiatives going forward to reduce cyclicality and increase returns I'm that we could start to see in 2021, just maybe flush out some of the big opportunities.
Okay.
Yes, I know, it's been very difficult year and it has been extremely volatile and continues to be extremely volatile from an end market perspective, so we're enjoying our diversity.
We always believe in that and feel it's an asset relative debt to cash flows and end markets.
But we need to control what we can control right now.
We recognize that while we feel as though our business is stabilizing from a revenue perspective, there continues to be risk ongoing risk.
Our initiatives around as Pat mentioned footprint and operating expenses are really across the board.
We have.
Touched probably 12 to 14 different locations with either full closures planned full closures or shrinkage of footprint. So that's been significant we've also made significant investments in automation.
And done things that I think again will.
Focus on areas of the business that we're not operating efficiently.
Whether they be specific plants or operations or manufacturing cell. So.
Literally are in that dozens and dozens of things that are being worked on so.
It's a fairly detailed comprehensive plan that allows us to do the things that.
You know that are a little more obvious in a downturn and then.
And when you're focused on more explicitly on growth.
I think in terms of what we're focusing on in terms of evolving where we're investing in terms of products and ideas.
Theres again, I mean, our business as you know is in the trenches yes.
Supply technologies has a number of initiatives going on but.
I would certainly mentioned a a couple one of them would be on this mistake the.
The mission excuse me precision machine components initiative.
Which is really moving away from some of the fastener product. We've historically been involved in which sells for pennies into really more significant complex items, which often sell for dollars if not tens of dollars. So thats at an ample opportunity to provide solutions and highly engineered solutions.
At the customer level for for customers that already depend on us.
We have ongoing initiatives, there continue to and MRO and while aerospace is getting beat up while we continue to advance our product diversity there into.
Components like got connectors and other things.
In our automotive business, you know again, I think Pat touched on our stock product that lends itself incredibly well to the conversion to electric cars. So we see tremendous opportunity and we're investing in that as we speak as well as on the fluid management side.
Cooling products are becoming more important as heat management is a bigger deal and hybrids and electric cars. You know, we're also focusing aggressively on really protective groundless and so forth so forth for for the increasing power.
Power, that's being moved around the car last seen I E G.
Got this press up and running in Arkansas, I think we're going to see significant opportunities. We go into 2021, even without a recovery in the rail market, we've talked in the past about construction markets and so forth.
The opportunity to diversify that facility away from a rail is a great opportunity and candidly weve reinvigorated weve reinvigorated our R&D on the induction side, we've got some great products that we've always been good in evolution relative to our customer needs. We've never always been as thoughtful about right.
Evolution in terms of problem solving with the broader market needs and I think we're doing a lot better job of that and lastly, weve always emphasized aftermarket, but I think we're trying to invest in the tools necessary in the team necessary to really get a greater share of wallet as well for our customers. So that's a lot, but I just want to tell you. This is as always in the ultra.
Yes.
That is a lot I mean, that's a lot of really exciting initiatives. So when you when you're talking about having touched the 12 to 14 locations.
For permanent closures or footprint reduction those those will be permanent changes without that don't necessarily impact your ability to ship product or your throughput.
So I guess said another way you are shrinking your cost footprint, but without limiting your ability to to drive higher revenue, which is that a factor in the higher returns.
Yes, Steve this is Pat ABSSSI.
Absolutely, yes, each of the locations that are affected before decisions were made either downsize or close we ensure that any business of customer related business was able to be serviced by the locations that are benefiting from from that downsizing or closing.
So clearly this is an effort to reduce our fixed cost footprint to allow for improved absorptions.
Each of the locations when when revenues return.
And I would see it touches each of our our segments.
Probably more so in our assembly components segment, but we consolidated an awful lot in in our supply Tech segment as well.
Steve Steve I, just want to point out something that you didn't ask but I'm going to say.
You know culturally our DNA is to have a very decentralized agile management team.
We really believe and authority at the local level so to be clear, we're not straying from that philosophy. What we are doing is pushing people to identify critical synergies in the business that.
You tend to see when the tide goes out so I don't see any any real shrinkage on the customer side I, just see better lower cost operations.
Yeah that sounds great.
As you think about the revenue stabilization and I understand there's still a lot of end market uncertainty, especially going into Fourq you, but do you expect to see sequential revenue improvement again in Fourq, you any chance it could even get to flat against a fairly easy down 6.5% comp in Fourq Your 19.
Steve I would just echo matts comments that our our end markets are stable linked stabilizing we saw in the third quarter as.
Some ramp up in certain end markets that we don't expect to reoccur in the fourth quarter.
We have other markets that we are seeing signs of a better recovery.
In particular heavy duty truck.
So.
It's difficult right now to see that see how December is going to shake out with the seasonal.
With the seasonal softness that we normally see.
But I think the key here is that our end markets are stable and we should be in good position as we head into next year to to increase our revenues.
Got it and I'll ask one more and get back in line.
Just a similar question on on four key margin any unusual cost items or mix headwinds that you expect this quarter or will some of these cost actions you've taken allow you to keep detrimental to kind of that mid to high teen plus or minus and for Q.
I would I would expect similar.
Margins in Q4, as we head into next year. So much of the restructuring is completed we do have some things that that are being worked on and will continue into the first quarter of next year, but.
But overall our margins, we expect to continue to be enhanced.
As we head into 2021.
Thanks for the time.
We're also off that we what we've seen and stabilization has largely come from supply tech on the margin side.
So that I think is as wonderful because that's high return on invested capital, but from an overall margin profile engineered products historically been our highest margin business.
So I think we're excited and we're making all the right moves to be up and the things we can control to improve margins in that business, but.
Little bit of help there in 2021 should be amplified through our consolidated financial statements.
And I would also taking one more job, yes, Steve one more thing on the margins.
While automotive volumes have returned.
Getting people to show up to work, we have hundreds of jobs open at any given day getting people to show up to work and work efficiently is a huge chat ongoing challenge. So our opportunity there on the margin is on the margin side more than than the revenue side and we're getting our arms around it more every day.
Very good thank you.
Thank you. Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities. Please proceed with your question.
Good morning, and thanks for taking my question here.
Good morning, good morning.
On the last earnings call you talked about a 100 million plus of new sales that was delayed into fiscal 21 could you. Please provide an update here maybe what type of cadence should we be expecting from a ramp perspective.
Yes.
As I mentioned Sarkis.
You know we expected some delays in the launches that were were happening.
That business has not been lost a.
We continue to believe.
That our growth and assembly components will exceed $100 million incrementally.
The question is really around timing.
So I would expect we'll begin to see that incremental revenue increase throughout 2021 as as volumes begin to ramp up in each of the with the the product lines that we're talking about.
Understood and what the margins.
Be any different from an incremental basis relative to maybe what we're seeing now given all the improvements you're making from a cost structure perspective.
Absolutely the reason for much of the reduction in our books fixed cost footprint is to allow for the improved absorption in the plants that are getting this new volume.
So we would expect margin expansion as a result of a you know as a result of the new revenues coming in.
Sorry, I guess I would add I.
I would add that this is we talked a lot early last year about the opening of two new facilities and our automotive segment one in.
One in Mexico, and one in a in China.
In addition, Dow and Innoswitch Changshu as well, where we was a little bit of an older facility, but the punch line is a lot of this business is earmarked for those locations. So not only do I think it's it's at good pricing margins I think there's tremendous opportunity to achieve lower operating costs and more absorptions and some facilities that are still underway.
Under.
Under absorbed.
That's helpful and which of your segments are you seeing any potential new wins today and maybe if you can talk to.
Some activity in end markets or maybe specific customers.
Yeah, I would characterize new business development as having been a fairly stable through.
Through the through close it.
I don't know that we're seeing a significant transitional business.
I think a lot of people are a lot of always our.
Cove It is is.
Providing them less and less instinct or less desire to take rate risk on the supply base.
But I do think that we continue to see a strong interest at supply tech relative to our mid market initiatives in our MRO work.
Again more in the in that 500000 range customer rather than the $5 million customer.
I think on automotive that design work and the energy around new product development continues to be robust so our quoting funnel, there and in China, or the U.S. and a little bit in Europe is still it probably all time highs. So we continue to see tremendous activity on the new product.
Element side and automotive.
Again, I think I'm, not something necessarily that will would be transitional over the next 12 to 18 months, but you know solid performance at all allow us to get sort of the.
The mid range growth as an underpinning to our our success.
Great and one last one from me maybe if you can talk about the target level of free cash flow generation.
Kind of considering the potential working capital build assuming volumes recover maybe help us understand how you're managing that.
Sure.
Yeah, as we head into 2021.
The diversification of our business and the margin expansion that we expect is going to be a very positive impact to our free cash flow.
You know so I think when you look at historic levels of.
Of free cash flow right around $50 million.
Annually is definitely a level that we should be able to exceed moving forward.
Managing working capital is a.
Depending on the business segment, and where we see the growth is always challenging and being able to manage our inventory levels is the key.
And we do a pretty good job of that.
Yeah.
And we've seen that during the course of the third quarter and we expect to continue to see that in the fourth quarter.
Fourth quarter free cash flow I mentioned.
We're going to see about $10 million of Capex.
That should translate to a free cash flow number somewhere around $10 million in the fourth quarter.
Hopefully that that's helpful do sarkis.
Yes, Thank you I'll hop back in the queue.
Okay.
Thank you. Our next question comes from Marco Rodriguez with Stonegate capital markets. Please proceed with your question.
Good morning, guys. Thank you for taking my questions.
Pardon me.
I'm wondering if I'm on that you can kind of circle back around on some of the strategic initiatives here that you discussed in the first question.
And more specifically in terms of how that's going to drive I'm kind of a higher ROI C type business for you guys. I was wondering if maybe you can kind of help.
Frame or to find any sort of levels of returns on invested capital that you might be targeting any sort of timeline that might be helpful. For us to kind of think how you're pushing this initiative through to the to the company.
Yes sure. We these are first of all these are all active initiatives everything I've laid out maybe with some of that with the exception of some of the IR or some of the R&D or industrial equipment group. These are all revenue producing strategies today.
Each of them leverage operations engineering expertise and leadership teams we have on board today. So these initiatives are not pie in the sky. So to speak there there were actively marketing an engaged in these strategies. So you know as we as we move into.
You too.
2021, all of these should achieve you know.
25% to 30% return on invested capital in minimum or based on the incremental opportunities.
That reside within these teams. So we're very excited about it I don't know that independently any of them are transitional in terms of.
2021 revenue and returns, but every one of them is significantly incremental from a profitability and return standpoint.
Pat would you agree with that.
Definitely I think in in each of the businesses as we've invested in whether its growth capital or or in value driver initiatives. We expect a very high internal rate of return on each of those investments.
I understood and then I met I appreciate you coming out in answering the question in terms of the structure of the business.
Not really not we're sort of changing despite the fact that a lot of these initiatives sound like they're there from the central versus a decentralized structure, but wondering if maybe you can kind of hit on the the structural or incentives you might have in place or thinking of putting into place the kind of dry.
These initiatives.
Decentralized structure.
Structure.
Yeah right.
That's a great question.
And something we spend a lot of time thinking about you know we continue to again, I mean value and give a lot of responsibility and authority at the local level, but we have initiated a reorganization.
Around a key leadership team at the operating level that is intended to streamline.
Streamline the way that we work with the different operating EPS and I think that they're doing a great job in pushing forward and collaborating with us.
On additional investment and if that's necessary or more often just and approval process to move forward on advancing some of the structural items. So it's a real partnership and again, we're not we're not adding per se a layer of management I think we're just streamlining the decision making process.
To access some of these best practices out there and to secure the type of investment necessary to get these value drivers, which in most cases, our six month paybacks.
Got it and then maybe also Matt if you kind of address you got to pay down debt using the free cash flow just to kind of help.
From a liquidity aspects of your business, but how should we start thinking about that business as you progress forward out of this uncertainty and with with coded where M&A becomes maybe perhaps a little more prevalent I know you've addressed in the past you know your comfort levels with certain.
Ratios in percentages of leverage but can you maybe kind of talk about that if that has somewhat change somewhat with the focus.
On the improving margins, how should we kind of think about that oh that process for you guys.
Hi, Mark this is Pat I'll take that question.
This company has been built around.
Both.
Strategic M&A as well as organic growth, we don't expect to change any of that.
We've continued to believe that de leveraging our balance sheet is important.
But we also believe that.
We can we can de leverage the balance sheet, while continuing to make strategic the strategic acquisitions and that was the core.
Philosophy that we've had for a number of years and that'll continue.
Mark I want to I want to add something because this is a really important point.
Some of that effort, we're putting into into increasing our long term competitiveness and some of the changes we're making to our operations.
As.
As built a leadership team.
And then and at an operating excellence. He knows that is really going to work well when we start to do acquisitions again and that could be anytime.
The point is is these teams I think are well positioned to integrate and execute on not only acquisition.
Acquisitions of the size range, we're typically end, but even bigger if necessary. So we're going to be very strategic very targeted and very prepared to execute on a business plan.
After an acquisition.
More than ever I would say.
Got it very very helpful and Alaska question I'm, not just can you give us an update on the M&A landscape.
Yeah, Pat Pat and I worked together on that area quite a bit.
You know I think that we.
Have a handful of targets pre coated some were further along in terms of what we felt we could get accomplished KOVA definitely put a hold on some of those processes.
Yeah, we continue to to work with those targets and continue to talk to them. You know I think the lack of visibility candidly still troubling and while I think we've got as I mentioned a.
A handful of opportunities I think what really suit our business and we also I think we need to be careful to not get over extended until we really get a sense of where we are so some of these markets are going.
Got it thanks, a lot guys I really appreciate your time.
Okay.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Mr. Crawford for any additional closing comments.
Great I appreciate everyone's support and interest in our company again, we feel like we're making progress purchase.
Particularly in terms of re fashioning, our business tied to higher margins and high quality higher quality of earnings and controlling the things that we can control. So thanks for your support.
Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.
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