Q2 2021 Park Ohio Holdings Corp Earnings Call
[music].
Good morning, and welcome to the Park, Ohio second quarter 2021results conference call. At this time, all participants are in a listen only mode and.
After the presentation. The company will conduct a question and answer session. Today's conference is also being reported 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 and risks and uncertainty.
These may be found and the earnings press release as well as and the company's 2020.10-K, which was filed on March the <unk> 2021 with the FCC.
Additionally, the company May discuss adjusted EPS and EBITDA as defined adjusted EPS and EBITDA as defined are not measure of performance under generally accepted accounting principles for a reconciliation of EPS to adjusted EPS and for a reconciliation of net income attributable to park, Ohio common shareholders.
EBITDA as defined please refer to the Companys recent earnings release I will now like to turn the conference over to Mr. Matthew Crawford Chairman President and CEO. Please proceed Mr. Crawford.
Good morning, and thank you for joining us.
Pat Fogarty, our CFO with me and ask for some comments, we'll open the line for questions.
While we're pleased with the continued broad based rebound and revenue across our business and end markets. The second quarter was frustrating as we manage the complex backdrop of challenges.
Supply chain challenges, most notably related to semiconductor chips, and our auto business not only caused a significant reduction in revenue for the quarter, but perhaps more daunting caused weekly volatility and demand that created significant inefficiencies and our manufacturing facilities.
In addition availability of labor labor costs, where daily challenges across our north American footprint, and exacerbated difficulty and locations, which were seeing increased demand from their customers.
Lastly increases related to inflation and raw materials and freight continued to put pressure on the current period profits.
Most of these challenges we discussed during the first quarter call, but the size and the speed with which they continue and the second quarter, especially in automotive was more significant than we had anticipated having.
Having said that our team continues to address these challenges with urgency and although it may be difficult to see and the results our strategies around pricing and continuous improvement activities, reducing costs through investment and utilizing our flexible manufacturing footprint continues to pay dividends and power.
Paul outlined some of the specifics.
But we anticipate that we have worked through some of the most challenging issues and will return to more normalized profitability environment as the year progresses.
On a more positive note new business awards continue to outpace budget across our company.
Notably our engineered products segment and has seen robust booking activity during the quarter.
Recovery and this segment has taken longer than we hoped for we have confidence that this segment, which has historically led our business and margins will make meaningful progress during the remainder of the year.
I want to thank the entire park, Ohio team. While these results are not what we have worked for and I'm proud of the way we've worked tirelessly supporting our customers and helping each other during a quarter filled with unexpected difficulties.
With that I'll turn it over to Pat.
Thanks, Matt.
Our second quarter results reflect continued end market strength and our supply technologies segment, the impact of the semiconductor chip shortage, increasing raw material and labor costs, and our assembly components segment and strong bookings of new orders and our engineered products segment.
Our consolidated net sales of $350 million on the quarter were up 53% compared to a year ago as demand levels in 2021 and have substantially recovered from the low demand levels from a year ago caused by the pandemic on our sequential.
Central basis, net sales and supply technologies were consistent with first quarter levels and net sales and our engineered products segment increased 13% and the second quarter.
The overall decline and second quarter sales compared to the first quarter was driven by the impact of the semiconductor chip shortage on product sales and several key OEM platforms, including the Ford Explorer and F 150, and the Jeep Cherokee and the Chevy Equinox, which impacted our assembly components segment.
GAAP EPS for the quarter was a loss of 44 cents and adjusted EPS, which excludes primarily plant closure and consolidation costs was a loss of 33.
Our operating loss for the quarter was a direct result of the chip shortage, which caused significant volatility and certain facilities where volumes on key platforms fluctuated widely from week to week.
We estimate the impact on our net sales and the quarter was $24 million, resulting in an EPS impact of approximately 55 per share.
The EPS impact was a result of the low production levels and certain facilities for labor inefficiencies caused by the demand volatility and labor shortages.
And the low fixed cost absorption levels.
In addition, significant raw material increases most notably rubber compounds used in our molded and extruded rubber businesses and aluminum alloys used in our aluminum casting facilities and.
Impacted our results by an estimated 15 cents per share we expect the recovery of these raw material increases will occur throughout the second half for the year once pricing begins to stabilize.
Other less significant impacts to the quarterly results included a labor strike and a key heavy duty truck Assembly plant impacting supply technologies results and increased freight costs and supply chain constraints affecting most of our businesses. These unfavorable events overshadow the continued performance.
And our supply chain business and improved results and our capital equipment business.
Our SG&A expenses were $43 million compared to $35 million, a year ago, returning to a normal level versus a year ago.
As a percentage of net sales SG&A expenses, and the current quarter decreased to 12% compared to 15% a year ago and.
Interest expense totaled $7.4 million compared to $7.5 million a year ago, the decrease driven by lower average borrowings during the quarter.
And the income tax benefit and the second quarter of $2.8 million represented and an effective tax rate of 34%, which is higher than the U S statutory rate of 21% due primarily to the recognition of certain discrete tax benefits during the quarter and the composition of earnings for the.
Full year 2021, we estimate and effective tax rate of approximately 22%.
Our liquidity continues to be strong and totaled $221 million as of June 30th up 12% compared to a year ago and consisted of $55 million of cash on hand, and $166 million of unused borrowing capacity under our various banking arrangements.
During the first half for the year net cash used by operating activities was $23 million, primarily to fund higher working capital levels during.
During the second quarter inventory levels increased significantly and support of increased customer demand levels and extended supplier lead times and global supply chain challenges. In addition, higher raw material and inbound freight costs and inventory builds to support our various plant consolidation activities also increased.
Our inventory levels.
We expect the incremental levels of inventory, which approximated $25 million year to date will decrease and the second half of the year and returned to more normalized levels.
Capital expenditures during the quarter were $8 million, primarily and our assembly components segment for new equipment to support new business launches and our aluminum and molded rubber products businesses. We continue to estimate that our full year 2021, capex will be and the range of $28 million to $32 million.
Now turning to our segment results and supply technologies net sales were $155 million during the quarter compared to $158 million and the first quarter and $94 million a year ago.
Average daily sales during the second quarter were similar to first quarter levels, Despite lower levels due to the heavy duty truck and market caused by the labor strike at a major assembly plant, which affected a full month of sales.
Overall, we saw continued strength in most end markets, most notably in the semiconductor power sports Civil Aerospace and the electrical distribution and markets. We are encouraged by the sequential improvement and sales to the civilian and aerospace market, which was up 45% compared to last quarter and sales from.
Our recent acquisition and why Kay.
Operating income and this segment totaled $10.2 million and operating income margin was 6.6% on.
Operating income and margin were both impacted by higher inbound domestic and import freight costs and.
Including expedited freight caused by global supply chain constraints and the impact of the labor strike.
Excluding these factors second quarter sales and operating income would've exceeded first quarter levels.
And our assembly components segment sales were $110 million compared to $126 million and the first quarter sales and the current quarter were negatively impacted by the semiconductor chip shortage, which resulted in lower sales of approximately $20 million and this segment.
Weekly demand fluctuations and OEM plant shutdowns and delays had a material impact on certain plant production schedules and sales during the quarter.
We expect the shortage will most likely remain a challenge for our auto related businesses throughout the second half of the year.
Although it is difficult to project the full year impact at this time, we estimate that the sales impact and the third quarter will be approximately $15 million to $20 million based on current customer schedules.
As we have mentioned on previous calls we continue to launch new business and this segment, which we expect to positively impact sales and the second half of the year.
We incurred an operating loss of $6.1 million and this segment compared to operating income of $6.4 million from the first quarter driven by several factors.
First the chip shortage continues to impact automotive demand and many of our operation, causing extreme fluctuations and production and significantly higher plant operating costs.
Second rising raw material prices, especially in our aluminum rubber business, where prices have increased in excess of 20% unfavorably impacted our profitability.
We expect to begin to recover these higher material costs throughout the second half of the year as customer pricing adjust for the market.
And finally increased labor costs caused by local labor shortages continue to impact our operations and this segment and response to the labor shortages affecting certain plants, we increased wages and other benefits to help retain our direct labor workforce and increase the use of temporary labor.
As a result, the second quarter was impacted by the increased wages training and recruiting costs and production inefficiencies and higher scrap levels.
And response to these operational challenges, we have realigned capacity levels and shifted certain processes to facilities with open capacity and lower labor costs and also during the quarter, we incurred nearly $1 million of charges related to plant restructuring closure and consolidation activities.
We expect these actions will positively impact for this segment's performance and the second half of the year.
And our engineered products segment sales were $86 million compared to $76 million and the first quarter and $79 million a year ago.
Sequentially sales increased 13% driven by increased customer demand and our capital equipment business.
And this business sales were at their highest level since the first quarter of 2020.
More importantly, new capital equipment order levels continue to improve.
During the first half for this year, our new equipment order levels increased 65% compared to the second half and 2020.
New orders, which totaled over $45 million during the second quarter.
I'm from customers throughout every region globally.
And in various product lines, including induction hardening applications and melting systems for the steel and foundry and markets.
We continued to see strong bookings of new capital equipment orders during the month of July and believe sales and profitability and this segment will increase and the second half for this year based on the strength of our backlog.
In addition, our aftermarket sales and services business and both the United States and Europe has increased each quarter since June of last year we.
We expect that trend will continue.
And our forged and machine products business sales continued to be impacted by low demand from several key end markets, including oil and gas commercial and military aerospace rail and agriculture prop.
Profitability was negatively impacted by the lower sales levels as well as higher production costs and downtime at our forging plant in Arkansas and additional cost to complete certain legacy forging equipment orders, which were delayed during the pandemic.
The operating loss and this segment, which totaled 700.
And the current quarter was primarily driven by the lower sales and operating losses, and our forged and machine products business and $600000 of costs related to plant closure and consolidation activities.
And finally corporate expenses totaled $6.8 million during the quarter on a year to date basis corporate costs totaled $12 million and the first half of the year compared to $14 million and the second half of 2020.
With respect to our previously communicated 2021 financial outlook, we continue to expect year over year organic sales growth to be within the range of 8% to 12%.
And capital expenditures to be and the range of 28 million to $32 million.
With respect to our outlook regarding EBITDA as defined and we now expect margins to improve by 100 to 150 basis points over the 2020 EBITDA as defined margin of 5.6%.
And finally, due primarily to the working capital required and our businesses, we expect to use up to $15 million and free cash flow for 2021.
Now I will turn the call back over to Matt.
Thank you Pat for.
We open the line for questions I want to.
Reiterate our frustration.
Around these results.
We believe strongly as a management team they do not reflect that.
And the progress on.
On executing what we expect to be a fundamentally reshaped the business.
After we complete the restructuring I want to remind people of 3 things we've worked tirelessly on and discussed on each call.
First is the restructuring we continue to be involved D. C. For some you see from the results. We have some restructuring add backs our priority is to emerge and the next 12 months as.
As a business a leaner and more focused business.
And that can be more nimble and these more challenging times. So when we started this restructuring 1 of the things that we didn't focus on as much and now we're laser focused on is the availability of labor and Pat mentioned that in his comments. So as we continue to restructure the business and make ourselves more lean and more nimble.
And in a position to garner more operating leverage. We're now also focused on where we can find labor. So that's changed some of our thoughts around the business, but it has not changed our appetite to continue the restructuring towards this goal.
And secondly, our initiatives around investing and our best and highest return.
Alex and services.
We have innovation happening across the business and across the segments.
We have a number of new product launches and ideas that continue to drive new business sales at high margins and.
We're not walking away from those those are great great ideas across the business and we continue to focus on innovation and our company.
And also we're focused on deleveraging while growing the business.
<unk> had to utilize more cash and we thought to secure our supply chain and.
And many many cases, where and long term agreements and we need to focus on on fulfilling for filling the customers' needs.
So we've had to protect our supply chain by using more cash than we would've expected at this point it doesn't change our goal about deleveraging while growing.
New business as I mentioned is ahead of schedule and also pricing has taken center stage. So pricing now is a key prong and are on our growth strategy as well and our margin enhancement strategy we may.
Made a ton of progress on that and the second quarter.
Some of it is delayed on weather.
Other IP contractually, we negotiated increases that don't kick in until during the third quarter or in some cases like and our aluminum group, we have index pricing that trails the market by by 3 months, it's quarter over quarter pricing. So the good news is its contractual we'll see the increases the bad news.
And a rising raw material environment, particularly the spike we've seen and aluminum those increases trail the market. So.
And again, that's so those are 3 things that we continue to be focused on and we're continuing to be focused on them and observing the new environment and we're staying committed to all 3 so so with that I will turn it over to questions.
Yes.
Okay.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is and the question queue. You May press star 2 and if you would like to remove your question from Q Park.
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1 moment, please while we poll for questions.
Our first question is from Steve Barger, with Keybanc capital markets and coffee.
Please proceed with your question.
Thanks, Good morning, guys.
Okay.
Matt you maintain the sales guide so it sounds like this isn't a demand problem. It's more timing. So just going back to the inventory comments are you running any of the plants on a more normalized basis now and just holding the inventory to ship when needed and can that help with labor and absorption.
Yes.
I'll start with that.
Again I a lot of progress continues to be made and will supply technologies has performed well and the environment.
Engineered products is making progress that we're very happy with albeit a little more slowly than we would have expected. We're really focused on the automotive segment right now and in response to your question.
We have built inventory there we are trying to normalize but it would be hard to.
I don't think we've ever seen and environment quite the way it is.
Just as recently as yesterday, GM released and just before they release they talked about taking that 3 truck plants down for next week.
So they talk about shifts I'm sure it's related to Chip's. My guess is they must have known what their chip inventory wise. So I suppose there's some other supply chain chats plate supply chain challenges as well.
I think that our desire to build inventory has its limits, we don't always know and this environment, where Saar will be and how those how those how the oes will allocate their supply chain issues on shifts and other things. So we do have an appetite to.
I'll leave the inventory, we do have an appetite to build inventory when we have labor and we can do so are competitively and profitably.
But there are programs that they now believe for the year well established programs that the Oems that they now believe.
And we'll ultimately they will buy a third or 40% of what they thought at the beginning of the year. So we got to be careful building inventory into things that debt the losses could be more permanent for certain models.
Yes.
And I think Pat mentioned and some of this in his script. So as you think about that with your labor issues does it makes sense to have less rooftops or more product line diversity and specific plants, just kind of how are you addressing that longer term.
It's a great question.
And just trying to and I did we take.
<unk> taken the answer is our expectations around this restructuring before this quarter.
Was about having less rooftops was about concentrating where we have the.
Best positioning for long term competitiveness.
A lot on that was exclusively around cost and in the past and that now I think it's a little bit about availability of labor and consistency so I.
I think our Formula if you will is a little different on in terms of how we think about it but yes. The restructuring continues to include less rooftops and investing in our world class locations, So unquestionably and that will be true and the automotive group as well we need again. This is an example that we need to.
Not only focused on a restructuring on cost, but also on being nimble and this has a lot to do with being nimble. So.
We need to be able to react in an environment for the next decade that could see fluctuations around build rates on a particular model it used to be 10% and the year was it was a big variance to what they thought they build and they would do it through rebates. They would just push a product line because they were set up to build it and what we're seeing now is volatility that is.
And our require.
Suppliers to be way more nimble and they would have in the past. So that's where we're going that direction anyhow, we're going faster and again this is an area where.
This is frustrating for.
And we at Park, Ohio, and and our automotive group, because we think we're making a lot of progress on that and it doesn't show up and the numbers and we understand that that's not good enough.
And just given how fast things are changing how do you think this plays out and the back half I guess why do you think it gets better and are you seeing other areas of material availability problems.
Okay.
Just say I don't know how it could get worse.
And a little bit, but let me ask Pat answer that more explicitly.
As Steve and I think a couple of things are expected to happen and the second half for the year clearly on raw material prices, we expect to recover some of those large increases that we saw and the second quarter I mentioned raw material prices were up 20%.
Which is obviously a huge increase in a given quarter for.
For the full year aluminum prices are up 30%.
Robert compounds, we expect.
And to continue to be somewhat volatile although.
Customer price increases, we hope will cover some of the increases.
In the quarter, we moved a significant amount of.
<unk>.
Operations to different plants to free up labor.
We expect the benefit of that to happen and the third and fourth quarters.
In addition, we're launching some and have launched some pretty large programs and the automotive group, including.
Fuel rail products for the Gen 5 engine, which we expect to significantly impact.
Absorption levels and certain plants.
Our business that has been expanding.
In Mexico and <unk>.
<unk> continues to to perform very well.
And with recovered volumes and the new business that we're launching.
We expect.
A nice flow through of profitability on the increase in revenues.
So those are some of the things happening and assembly components.
<unk>.
And may.
And maybe a more exciting story that we're seeing within our engineered products segment, where our backlogs are at a level now that we feel should enhance our profitability and the second half for the year.
Having a quarter with $45 million of of new capital equipment bookings is a level that we haven't seen and a long time.
Timing of production of those of those new projects will take hold and the second half of the year.
So we're very optimistic there the aftermarket parts and services business.
<unk> continues to trend and the right direction.
All that being said and a segment, where we still see low volumes from oil and gas, we still see some low volumes and.
And some of our forging.
Products, but overall, that's a real positive story that we expect to take hold and the second half of the year supply Tech continues to perform as.
As expected and above our beginning of the year operating plans.
We expect and market strength to continue it was nice to see the civilian aerospace market.
Hiccup and the in the second quarter, we expect that to continue throughout the second half.
So a lot of real good things happening.
And some of the challenges faced in the second quarter, we expect to improve on and the third and fourth quarter.
Steve I would add I want to be explicit on what Pat said.
It will take a while for the human resources strategy to settle and there is permanent and cost increases and doing business with.
And you'll have to fair it out, but our results from the second quarter, our poor results reflected problems with availability of labor, which included having to work 7 days, which means even higher cost it means scrap rates it means.
And all kinds of issues that come with.
And trying to operate and the facility, where you can't get enough people to meet your contractual requirement. So.
And that will begin to stabilize.
And then we will have to continue to focus on the pricing side of it is to recoup the additional cost of doing business. So we sort of saw the worst of both and the second quarter. We won't work through both sides of this for a little while but will begin at least to see some stabilization. Our goal right now has to get has to be nimble enough to make sure that we're.
We're working 5 days, a week and we're working profitably and.
And the programs that are running.
Really appreciate all that detail and ask 1 more and I'll get back in line I know you didn't have full guidance out there, but I just have to ask why not pre announce or just give some heads up to let people know that results were going to come and well below expectations as you saw the quarter unfolding.
Yes, Steve I'll address that.
Okay.
Our guidance that we give is really minimal guidance around revenues and EBITDA margins.
Our quarterly numbers, often fluctuate significantly we do not give EPS guidance.
And we felt that.
The guidance debt, if there was to be and advance.
Please would not come with the color and the details and the context of of some of the reasons why.
Which is important that we have this call.
And be able to communicate kind of the reasons why without doing it and advance release.
Understood. Thanks.
Our next question comes from market share sure bet Chen with B Riley Securities. Please proceed with your question.
Hey, good morning, and thank you for taking my question, Matt and Pat.
Question for Chris Good morning.
Yes, so just wanted to pick away at the revised guidance here I think if I look at the top line, even if we take the low end of that right for the first half sales performance. For example, and then just kind of back out what we're expecting for the second half I think it's let's say round numbers say 6.
<unk> hundred $90 million and topline and the backup you you gave the reasons on why you feel comfortable.
Comfortable are appropriate and I think the area that I'm, having a little bit of trouble trouble with it is the margin improvement on EBITDA.
And I'm, just kind of 100 basis point year over year improvement would imply.
And at least second half EBITDA of let's say $25 million a quarter and just kind of help me reconcile that given 12 million of EBITDA posted here and <unk>.
Alright.
Well I think sakes, we expect quite.
And quite a bit of improvement coming out of our assembly components segment based on the information that debt.
We've indicated.
New business being launched.
The flow through activities and our engineered products group and the second half for the year based on.
The increase and the volume.
And as significant.
And that business has historically been our highest margin business.
So we expect much higher margins coming out of that business segment.
In supply technologies for <unk>.
Another another good example, where we.
We were hit hard in the second quarter by some of the increase and freight.
Ocean freight as well as expedited freight we expect.
Much of that to ease and the second half of the year, which will enhance our margins.
So those are some of the things that that.
It had been built into this revised margin outlook that we believe are very positive.
Yeah.
Gotcha, Thanks for that and from some of the tech players out there, we're actually hearing chip shortages lasting through 2022, I guess can.
Can you reconcile kind of what youre seeing real time on the ground versus what some of the tech players are saying I just wanted to get a sense for.
How long this lasts and obviously, how it impacts for you and your customers perhaps into 'twenty 2 thank.
Thank you.
Yes, I'll take I'll take that.
Sorry, Keith this is.
Interesting question and 1 in which we don't really have full visibility to no..1 does what I will tell you is.
We believe that.
Sure.
We believe this will continue to be a challenge at least for the rest of the year.
I think that we will in fact to be quite honest with you I was pleased and surprised to see some of the guidance from the Oes on this on this.
On the revenue and profits for the rest of the year. So.
I would say that.
It will likely.
The process will hopefully be more transparent as the year goes on so we can be.
And more efficient and our operations.
And I guess is it will alleviate a little bit and I think thats, how we planned our business to be more efficient to be.
We've gone through the learning curve, a little bit in terms of of how to be more responsive and a more profitable level, but I think that.
While the worst may be behind us.
I anticipate this being and ongoing issue for the rest of the year and and probably into early 'twenty, 2 and before I think operations can resume with any type of normalcy and the automotive supply chain.
So maybe the worst is behind us, maybe but I agree with what you're suggesting.
And we can only hope that we can and that's more transparency and more ability to schedule a properly going forward.
And again.
Im encouraged but surprised with a positive comments coming out of the oes over the last couple of debt.
Got it and Thats helpful and I guess, if I can just kind of go back and 2 things kind of stuck out on the press release, 1 is the <unk> 55 impact on the $24 million.
And and I think it was the sales call out and then I think in the prepared remarks, you mentioned, the rubber compounds price and aluminum alloys impacting the quarter by $15 a share I guess, if we were to kind of step back and and look at the <unk> 15 per share impact you just called out relative to the pricing you are taking.
How quickly do you think and the back half of the year. This 15 per share kind of comes back and to the P&L.
Yes.
Most of that.
Price increase Sarky says and the aluminum products business.
And as long as we see.
And the price per pound stabilize and the second half of the year will recover 100% of that of that impact.
We did see a slight increase in and aluminum prices and the month of July although I guess, that's a victory if it's only a slight increase given what's happened and in the year.
But if prices stabilize we will recover.
Through customer price increases that entire impact.
Understood. That's all for me 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.
And Michael.
And I was wondering if maybe you could put a little bit more color around.
Some of the headwinds as it relates to the revenues and the automotive impact.
You talked about Q3, having another $15 million to $20 million hit but at the same time, you've got some really nice new business launches that are expected to positively impact second half sales can you kind of walk us through how youre thinking about that.
Revenue standpoint.
Okay.
Yes, yes.
Mark.
The impact of the chip shortage was solely related to that we believe based on new.
New business being launched that much of that will be offset by.
By the new programs being launched and the expected production.
And the second half for the year.
Okay, and then in terms of.
And the labor shortages that you're seeing can you maybe just put a little bit more color surrounding that is that just kind of what you're experiencing what most individuals are seeing where it's just difficult to find.
Employees because.
Either stimulus checks or because of the on.
Unemployment rates or are there other sort of factors that are sort of impacting your debt when it comes out on your labor.
Yes.
And.
Well this is Matt and Mark I would say first of all.
This is a regional issue.
On different locations are impacted differently.
So I don't know that there's a 1 size fits all answer to your question.
And in the most affected areas and our business.
Thank you.
The answer to each of your comments would be yes.
There is tremendous.
Rate pressure and competitive for those people willing to work.
So people show up to work and then they find another job. So it's a lot of time and money spent on on boarding and then they don't come there are.
Significant number of people.
Adjusting that they'll come in for.
Reply to.
And our desire to bring people in and then they don't show up and I think that does have something to do with our ability to apply for unemployment on the on the more relaxed standards currently so.
It's hard to put.
My finger on exactly.
But it's all of the above for the most effected locations and and.
And some are affected much more so than others, hence our strategy.
As part of our restructuring to be cognizant of where we see good pools of labor and more long term.
Understood and then kind of shifting here to your engineered product segment and it sounds like things are definitely moving in the right direction.
Based on what you see right now do you expect.
To kind of get back to that pre pandemic revenue levels, and a $190 million to $150 million revenue run run rate by the end of this year or is that more of a fiscal 'twenty 2 type of event.
I think we're going to see a gradual improvement and our in our revenues and that segment, but.
I would not expect it to get to that $100 million to $150 million quarterly revenue.
In the current year.
But we're heading in the right direction.
Having backlogs that exceed $45 million to $50 million.
<unk> is a good start to get us back to historic levels.
Understood and then Youre, commenting in regard to the oil and gas segment kind of little bit of underperformance, there and the E&P group, a little surprised by that just kind of given where oil and.
Oil prices are currently can you maybe provide a little bit more information in terms of what you guys are seeing there and what's kind of holding that back.
Yes. This is this is Matt.
We touch that business and a few different ways, but.
I would tell you that by and large our activities are more upstream.
And I think that it's been.
Clear and whether it would be and the rig count numbers or the comments from some of the big drivers for the upstream business that day.
There are strategic goal is to return more money to shareholders and drill less so I think that.
What that means to US is we still have a good business. These are good high margin products.
We're in many cases.
Selling innovation and or something that debt generally where the best source for.
But we also see I think.
Both reduced drilling and a desire by the large players to defer spending so I think that's got to play out a little bit until we see a return to normalization and I know your next question is going to be on that happened.
Does this business will come back maybe never to where it was but we'll come back to be a meaningful contributor and my guess is we're talking mid 2022 before we could expect it to be.
Yes.
And the kind of contributor on any measure that it's been historically or let's put it this way it should not be a drag.
Got it and last quick question from me, maybe Matt if you can kind of update us on your M&A pipeline and I know you guys just closed and equity issued supply tech, but just kind of.
Walk us through what the pipeline looks like today, what valuations are looking like.
Yes, I mean, we.
There's a ton of activity as always we are active to aggressively pursuing those that we see a fit we've got a couple on <unk>.
Conversations ongoing I don't think our sellers' expectations have relaxed in terms of multiples.
So I think that you can expect us to be active but very careful as we've been in the last year or so.
Great. Thanks, a lot for your time guys I appreciate it.
Okay Mark Thanks.
Thanks Marco.
Our next question is from Jim Dowling with Jefferies. Please proceed with your question.
And good morning, guys How're you doing.
Guys good morning, Jim.
And I could be off on the timing so you need a little benefit from it.
And maybe 2 years ago, 2 plus years ago.
You gave me.
And as to what the long term would hold and.
And my memory says you said, we can get to a $2 billion revenue level.
And and 10% plus EBITDA margin.
And if those.
Numbers are reasonably accurate from my memory <unk>.
Given all the changes that you've seen in your aftermarket.
After markets today and also.
Restructuring debt I presume you didn't foresee 2 years ago.
What would you say is a reasonable.
EBIT margin.
And that's achievable once normalcy returns.
Yep.
Well first let me start by saying.
We believe that the business businesses, we own today with some modest acquisitions.
And have the customers the relationships and the inherent growth internal growth opportunities to meet that goal.
So.
Particularly on the revenue side.
Obviously, we're back at about $1.4 billion 5 and <unk>.
What is a.
A.
And environment, where we still feel significant pressure on a few of our key markets.
So while we haven't returned quite to pre pandemic levels.
We think that the new business over the next couple of years is going to be accretive. There is no question, we took a major step back and on.
Our goals and from a timing perspective during during Covid and the pressure on a couple of our markets was.
Again, it's still sustained so but I still believe inherently we can meet that goal and the way that I just mentioned.
The profitability goal is still intact I would tell you.
We have more work to do on the restructuring side and on the pricing side than we did before COVID-19.
Inflation of this type is not something that we considered when we put that plan out.
And the good news is.
About 2 thirds of our business well, let's say a little over half of our business re prices.
Through the cycle. If you think about index pricing, probably 2 thirds to 70% of our business re prices through the cycle and I think thats, what <unk> been talking about there'll be some catch up having said it re prices at zero margin.
So and some cases, we will retrieve some margin but.
And in an inflationary market. The bad news is I think we've got our work cut out for us on the pricing side and a way we didn't have it when we originally established those goals. So the good news is.
From our competitive position with which our customers everything we do is more valuable and inflationary environment, our inventories more valuable our know how our customer relationship our sourcing relationships our manufacturing footprint our tooling so.
We are more important than ever to our customers, but we've got work cut out for us to meet those margin goals.
That were on.
Not foreseen.
And I continue to believe.
And that that $2 billion revenue goal is achievable over the next 3 years 3 or 4 years, we've got our work cut out for us on the margin side, but we can make significant traction on that particularly as we see some return to normalcy of our engineered products group.
That's been sort of a laggard here and as that improves I.
I think we're going to see some momentum towards that number but we've got on work cut out for us more so than we thought when we set that goal on the restructuring and the pricing side.
That's just the world, we live and now.
Okay. Thanks.
Our next question is from Jon Bock.
Please proceed with your question.
Good morning, guys, Hi, Jeff first of all comment then a question on common is in prior quarters or I guess, you might want to call on a clunker.
You've it's been kind of an endogenous event that was something specific to park, Ohio, but.
And this scenario the hull chip shortage is more of an exogenous shock hitting the whole Oems and the.
Suppliers, which you're on it right now so.
I guess you have to work through that and you're working through it but.
I don't know with misery loves company, you've got a lot of you've got a probably a lot of suppliers and Oems.
Vaccines situation.
And I know you guys are addressing that so that's the comment the question is yes.
Yes.
Okay, John Thanks for pointing it out to that comment, which gets sure Atlas, we haven't and the opportunity to watch the whole, earning cycle come through but we're not surprised to see some of our customers, which are principally oes doing relatively well.
And if when we drive by our customers and there are lots of whatever they might be selling their empty, whether it's cars trucks and snowmobiles are empty and theyre MTB cause they sold everything they have and the second quarter.
So I am pleased to see how successful our customers have been we root for their success, but understand it was the suppliers that got hurt to your point and the second quarter and not the Oes and and it will be interesting to watch them navigate going forward as they got to replenish that so our key is we'll see the volumes there.
And we're gonna have to see the volume. The question is can we execute and to Jim's question a minute ago can we execute at our margin expectations.
And so.
You make a very good point about.
About where are we set in the supply chain and what we can expect going forward.
Sure and again to that point.
I know you made a comment I think it might be and the prior quarter conference call that a little bit of inflation is a good thing.
And to which I might respond to care for what you wish for because now you've got to you've got a lot of inflation and you did adequately address the ability to try to catch up on the raw material increases.
Albeit on maybe a 3 month lag, which makes sense, but specifically I want to press you on this because lives.
And this question with other conference calls and whether or not and we see inflation being so called transitory here are really permanent when you have to go out and hire.
And they talk about ghosts employees that say, we're going to come in and they don't show up.
I mean, and when you have to not you have to materially increase starting wages and the net makes it it makes a difference with existing health because everybody talks these days regarding wage scales and I.
And to the twofold question would be I mean, what day what.
What are you looking at in terms of and increase that you have for for starting wages and then how do you implement that and how do you price that you and long term. Thank you.
Well great.
Great question by the way and you and I share the opinion that the labor.
Market is and the inflationary and not transitory.
Almost impossible, but and not be so we need to address that strategically around how we think about our footprint and where we want to do business long term and cost and availability are part of it right. So everything you just said, we can't throw up our hands and we need to address that and think about how we were.
And to do business for the next 10 or 15 years I mean, that's on us.
So that's my first answer my second answer is knowing it's not transitory. The second answer is and again availability is a bigger issue than cost.
So the second issue I would say is I.
I think that we need to be cognizant of well as well.
That in general our value add it's around our services are on manufacturing, which mean that in general and I don't have an exact number John our cost of direct labor is under 10%.
So.
This is an area that will well as a supplier will continue to re price.
The industrial World right and we will continue so we've seen sort of the heavy sledgehammer that hit and the second quarter related to and ability to find people and ability to get people to work.
As that levels out knock on wood, a little bit and it's really just about cost of labor that I think we can manage the system will re price itself and most manufacturing industrial companies have direct labor costs less than 10% of that for other product. So.
That part, we can manage and it's on us to manage it.
But getting people to come to work.
To be a challenge and we need to manage that ourselves and obviously, we hope for.
And as prices as hourly wages go up people will come into work.
We have some other drivers as well, but that's 1 of them.
Yeah, I think eventually it will be and the pricing and it's gonna be workforce education et cetera, but.
And it's a good point, 10% is direct labor, so that seems to be manageable.
And like you said, you're going to have to be agile and nimble and how you pass through not only transitory, but permanent price per.
And it cost increases so well I think the most business leaders I think most of us and the industrial sector and they could snap their fingers to pay 25% more and make sure everybody showed up to work that had been trained.
People would take that all day long every day.
And John World, where ramp.
Yes.
Operators and we can't believe these increasing the increase and cost is transitory we've got to do things like automation.
Not only be able to put our production and the low cost areas, but also improve on reducing our labor costs through automation and different innovative ways on the plant floor.
Yeah.
Absolutely well.
And closing you've got your 3 silos right now and it used to be when you were tier 2 automotive events like this could be a cardiac arrest moment, but with.
With a 3 silos and you're in multiple industries right. Now this can be a blip it will be solved and that's what management does and that's what <unk>. That's your work cut out for you and the balance of the year. So.
Good luck with that and and I'm with you guys. Thank you.
Yes. Thanks, I appreciate that you and let me just again, what I commented before we're all this does is brings urgency more urgency to the plan and we've already have we have tremendous liquidity and we're going to execute it first and foremost on on <unk>.
Supporting our operations and and resolving some of these issues through investment and automation through investments and the restructuring that's the first horse at the trough as I like to say so.
I appreciate your comments.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Mr. Crawford for closing remarks.
Great.
Thank you for your questions. This morning, I hope you sense, our frustration and our urgency.
And remember more so I think than many of the people you guys are invested in.
We are a management team that is highly invested in this company as well so we.
We are side by side and we're going to resolve this and.
And this just brings to us and a new level of urgency. So I appreciate your time today and your questions and.
We'll see and next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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