Q3 2021 Park Ohio Holdings Corp Earnings Call
[music].
Good morning, and welcome to the Park, Ohio third quarter 2021 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.
For 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, maybe found in the earnings press release as well as in the company's 2020, 10-K, which was filed on March 5th 2021 with the SEC.
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 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 company's recent.
The earnings release.
I will now turn the conference over to Mr. Matthew Crawford Chairman President and CEO. Please proceed Mr. Crawford.
Thank you very much and good morning, just a few comments before I turn it over to Pat to talk about the details.
Despite significant challenges most of our business continues to perform well supply technologies have seen or would show return to pre pandemic levels in terms of revenue and profitability.
This is despite ongoing challenges in supply chain as it relates to delivery and cost.
New business activity is on track for close to $30 million this year.
It is also worth noting these improved market conditions have benefited most of our customers, including many of our small and mid size accounts.
We continue to benefit from our broad diversity in this business from a geographic product and end market perspective.
I also want to highlight the recent edition of Brian Norse as president of supply technologies.
Ryan brings considerable experience and commercial leadership to Archie.
Engineered products in our industrial equipment business in particular is seeing a significant uptick in bookings. While this business is traditionally a light late cycle business. It is clear that we're seeing a resurgence in industrial capital spending driven by traditional industries and some newer markets like alternative energy that are growing rapidly.
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We anticipate strong revenue as we enter 2022 and will need to focus on execution to track towards historical margin performance.
The Forge group, which is also included in engineered products segment is beginning to benefit from improved spending in energy aerospace and rail, which have all lagged the general recovery.
Returning to our challenges in automotive, we're beginning to make progress addressing the daily variances in the business.
Operating efficient operating efficiencies have been negatively affected by availability of labor and the cost and waste related with high turnover.
We are accelerating our restructuring and shifting workload where possible within our footprint.
We're also investing in process improvements as well.
It is important to note that these operational variances are mostly related to two of our facilities were also challenged by the incredible spike in raw materials, while in many cases, we have a mechanism to retrieve some of these increases automatically the dramatic spike is disproportionately impacted our current results.
We will continue to address these increased costs through improved efficiencies and pricing and expect significant near term impact.
Most importantly, our results should not mask, the repositioning of our business for growth and improved profitability as we look into 2022.
During 2020 and year to date 2021, we've spent over $15 million in restructuring, which will improve our expense profile and reduce our under absorbed overhead.
Also year to date 2021, we have spent approximately $10 million on capex aimed specifically on cost savings and business optimizations.
All of these investments target less than a two year return at their worst.
So while these results are disappointing.
We believe they're highly localized within our business and while visibility is still very low at the moment, we see significant improvements as we enter 2022.
With that I'll turn it over to Pat.
Thank you, Matt and good morning all.
Our results in the third quarter reflect continued strength in our supply technologies segment and improving performance in our engineered products segment.
In our assembly components segment, the ongoing automotive OEM production challenges raw material price inflation and higher labor costs have affected our quarterly results and continued to be a challenge for this business segment.
Overall, our consolidated net sales of $359 million in the quarter were up 5% compared to year ago with improved year over year sales occurring in our supply technologies and engineered products segments.
Sales in our assembly components segment were lower year over year as a result of the continued supply chain challenges, which have caused production volatility throughout our OEM and tier one automotive customer base GAAP EPS for the quarter was a loss of 60 cents and adjusted EPS, which excludes primarily plant close.
<unk> and consolidation costs was a loss of 32 sets.
Our operating loss in the quarter, which was approximately the same as our second quarter operating loss continues to be a.
A result of the semiconductor chip shortage, which caused low OEM production levels on certain auto platforms, primarily affecting our assembly components segment.
We estimate the impact on our consolidated net sales in the quarter was $15 million, resulting in an EPS impact of approximately 34 cents per share.
In addition, labor inefficiencies caused by labor shortages and significant raw material increases primarily aluminum and rubber compounds impacted our results by an estimated 49 cents per share.
SG&A expenses in the quarter were $45 million compared to $39 million a year ago. Our current quarter SG&A expenses ran at a more normal level versus a year ago. When SG&A levels were significantly reduced during the pandemic shutdowns.
Interest expense totaled $7 $6 million compared to $7 $4 million a year ago, the increase driven by higher average borrowings during the quarter to fund higher inventory levels.
The income tax benefit in the quarter, a $2 8 million, representing an effective tax rate of 27%, which is higher than the U S statutory rate of 21% due primarily to state and local taxes for the full year 2021, we estimate an effective tax rate of 26 to $29.
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Our liquidity continues to be strong and totaled $218 million as of September 30, compared to $243 million, a year ago and $220 million last quarter and consisted of $60 million of cash on hand.
$158 million of unused borrowing capacity under our various borrowing arrangements.
During the first nine months of the year net cash used by operating activities was $26 million, primarily to fund higher inventory levels caused by supply chain constraints and increasing customer demand.
During the third quarter, our inventory levels increased $24 million in support of customer demand levels and continued log supplier lead times caused by freight carrier delays in.
In addition, higher raw material and inbound freight costs also affected our inventory levels. We estimate we are carrying approximately $30 million of incremental inventory as a result of the global supply chain challenges as of September 30th.
Capital expenditures during the quarter were $11 million, primarily in our assembly components segment for growth and margin enhancement projects. We continue to estimate our full year 2021, capex will be in the range of $28 million to $32 million.
Turning now to our segment results.
In supply technologies net sales were $154 million during the quarter compared to $155 million in the second quarter and $132 million a year ago.
Average daily sales during the quarter were similar to second quarter levels and up 20% year over year.
In the quarter, we saw strength in most end markets, most notably in the heavy duty truck semiconductor and agricultural and industrial equipment end markets.
In addition demand in our civilian aerospace market was up nearly 10% from last quarter, and 36% compared to a year ago.
We continue to have success with our new business initiatives centered around industrial supply and mid market accounts year to date, new customers totaled over 150, including over 30, new customers in the third quarter and various products and end markets.
Operating income in this segment totaled $10 $7 million in the quarter and operating income margin was six 9% up 30 basis points compared to last quarter op.
Operating income and margin were both impacted by higher inbound domestic and ocean freight costs, including expedited freight caused by global supply chain constraints.
We expect the ongoing global supply chain challenges to continue to impact our customer demand for the remainder of this year.
So far this year, our active price management strategy is minimize the margin impact of increasing product and freight costs. We expect our team will stay ahead of these issues and continue to work with our diverse customer base and supply change to minimize any future margin impacts.
In our assembly components segment sales were $120 million compared to $110 million in the second quarter and $127 million a year ago.
Sales in the current quarter were again negatively affected by the ongoing chip shortage, which resulted in lower sales and operating income in this segment of approximately $13 million and $5 million respectively.
Weekly demand fluctuations and OEM plant shutdowns and delays impacted certain planned production schedules again this quarter.
We expect the micro chip shortage will most likely remain a challenge for our OEM customers throughout the fourth quarter and into 2022.
Although it is difficult to project the full year impact at this time, we estimate the sale of the sales impact in the fourth quarter will be similar to third quarter levels.
The third quarter operating loss of $8 $9 million. In this segment continues to be driven by several factors first supply chain disruptions continue to impact automotive production on certain key platforms, primarily in two of our aluminum plants, causing extreme fluctuations in production and.
Higher plant operating costs.
Rising raw material prices in our aluminum and rubber products businesses impacted our profitability.
In our aluminum business alone raw material prices have increased 55% since the beginning of the year and 20% during the quarter.
And finally increased labor costs caused by local labor shortages is a challenge for many of our plants. Our third quarter results were impacted by increased wages training and recruiting costs production inefficiencies and higher scrap levels, resulting from these labor shortages.
Also during the quarter, we incurred $1 $8 million onetime charges related to plant restructuring closure and consolidation activities.
In response to the supply chain challenges and higher raw material and labor costs. In this segment, we have relocated production to lower cost facilities with open capacity automated certain manufacturing processes and implemented and will continue to implement customer price increases.
In our engineered products segment sales were $84 million compared to $86 million in the second quarter and $81 million a year ago.
In our capital equipment business sales were up 10% compared to a year ago and operating margins were at their highest level in recent years, driven by strong aftermarket sales and lower operating costs.
Bookings of new capital equipment totaled more than $60 million in the third quarter, an increase of 40% compared to last quarter and almost three times new equipment bookings in the third quarter of 2020.
Our improving performance in our capital equipment business was partially offset by the results in our forged and machine products business, where sales continued to be impacted by low demand from several key end markets, including oil and gas commercial and military aerospace and rail.
In addition to the strong bookings in our industrial equipment business in recent quarters, our backlogs in our forged and machine products business are also improving and expected to continue to increase as we close out the year.
During the quarter. This segment had adjusted operating income of $1 $2 million, excluding the $600000 of charges for a plant closure and consolidation. This was an improvement of last quarter's adjusted operating loss of $100000.
Finally, corporate expenses totaled $7 $4 million during the quarter compared to $6 $8 million last quarter, and seven $6 million a year ago on a year to date basis corporate costs totaled $19 4 million in 2021 compared to $19 $7 million in.
The 20.
'twenty period.
With respect to our previously communicated 2021 financial outlook, we expect year over year organic sales growth to be within the range of 10% to 12%.
And capital expenditures to be in the range of $28 million to $32 million.
We expect EBITDA margins is defined to approximate 5% for the full year and we expect to use up to 25 million to $30 million in free cash flow for the year.
Now I will turn the call back over to Matt.
Thank you Pat I will now open the floor for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that Youre line is in the question queue. You May press Star two if you would like to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Our first question is coming from the line of Steve Barger with Keybanc. Please proceed with your question.
Thank you good morning.
Good morning, Steve.
I'm going to start with the addition of Brian Norris.
He came from Grainger very data driven organization I know, it's only been a couple of weeks, but any thoughts on how strategy or execution might change under his leadership.
Okay.
Well I appreciate the question.
I would like to highlight that.
Certainly it's been a wonderful transition John <unk> was a wonderful leader of that business. He retires.
Down to Florida, So we wish him well.
We've got a nice overlap period between hand, Brian. So we expect that sort of just transition to go very well.
I can't really comment.
Yes, I think on specific thoughts and strategies around that Brian will have I will say that we have spent an extensive amount of time with him. We think he'll bring wonderful leadership experience and particularly commercial experience that I've mentioned.
He has observed to me that we also use data very well. So I think we're aligned on a number of our important strategic missions.
Including.
Continuing to develop.
Strategic.
Our strength outside of our core business.
Certainly he understands our industrial supply and MRO offering.
It has a greater appreciation for our core competencies as well so a little bit too early to tell but I think that he brings a really nice combination of someone who is an adjacent industry.
And truly understands what we do while having a sort of a broader view of the field. If you will.
Yes, thanks looking forward to hearing his thoughts on.
What is arguably your best business.
You can make that better so.
Just going back to to.
Assembly Pat I think you said the revenue will be flat sequentially in <unk> can you get back to breakeven on the operating line or between seasonality and everything else that's going on is that unlikely.
Yes.
The fourth quarter Steve.
With holiday shutdowns and.
Some supply chain constraints that we expect to continue.
To challenge the business.
No.
We're likely to not get back to that level that you mentioned.
During the quarter.
The operating loss of $8 $9 million was significant and there are some one time items in there plus we expect to begin to recover.
Some of that lag on raw material prices, but if you look at solely aluminum and what's happened even through the month of October although the rate of increase may have lessened in the month.
The price of aluminum that we use in making our aluminum castings is is still very very high.
And.
So likely the recovery will not occur until next year.
Only in the event prices stabilize and begin to drop.
Yes.
Our visibility is poor there's no question about it.
We've learned that all too well this year.
A couple of comments one is on the labor front I think there was some addition of fairly significant amount of jobs, we heard about this morning.
In the country. So I do think and hope that people will continue to return to the workforce any stability there will be a significant game changer for our business, but we're not we're not waiting for that in the meantime, we're moving work to where we can find people that will work.
So I think we're not we're not just sitting on our heels here, we will but that takes time, we're beginning to see the benefit of it. So the trajectory on labor I think is going the right direction, regardless of what the visibility is the volatility in demand plant by plant program by program is very very challenging of the changing sort of released this week.
A week.
We can expect to continue.
To see that through the holidays, which is a little frightening.
But the trajectory on labor for the reasons I've mentioned this in the right direction as you think about raw materials.
The consumer facing part of our business wherever it is.
We've seen it in the marketplace. They just change the price I mean cars are great example, selling half the cars, making twice the money are obviously being a little aggressive there, but it's a little harder for us to recapture that.
Other it is successful price negotiations that just hasnt been implemented yet or ongoing ones.
The trajectory there is as good as well so we can say with confidence that we're moving in the right direction, but.
A lot depends on on build rates and the things that are going on in the fourth quarter and shutdowns as you mentioned it but I don't want to I don't want to leave it as though we're just waiting to get luckier or not but we're not waiting for there to be a magic wand relative to semiconductor situations or not.
We're doing some things that are going to get this ball moving meaningfully in the right direction now.
Understood.
We can see that you are being proactive and the things that youre doing just from a conservative conservatism standpoint, we should probably model that the next couple of quarters <unk> 20 to <unk> 22, maybe probably look more like the last part of this year.
Versus seeing some step changes as you go into next year.
I think we should see some improvement I'd hate to say that we would continue to lose $9 million a quarter in the first two quarters of 2022 that will not happen.
I think we'll see some improvement as we go into the end of the year and then I think that will give us a greater ability to forecast at the beginning of next year.
But I agree with that.
I am.
I guess I got to be careful Vijay Singh I'm certain I believe we have.
With a high conviction that we've seen the bottom.
Yeah.
That's good to hear and I'll just ask one more.
Maybe on a happier automotive topic can you remind us how youre thinking about your strategy around evs.
How many Oems are you talking to what is content look like how do you see that progressing as that mix ultimately shifts I know, we're still obviously much heavier towards internal combustion, but that's that's what people are starting to talk about yes I.
Again, I think that let me tell you how I would answer that question in the past and idle idle.
Say it with more conviction of a little more detail this time.
Our portfolio of business and automotive.
The majority of that work is non.
It's not focused completely on internal combustion engine, meaning we like products that are agnostic and Steve you know our product line. So when we think about rubber molded products, we think about extruded products and all the applications that are not just fuel related when you think about our fastener technology. When you think all of these.
Applications on discussing right now are non ice focus so we feel very very our aluminum excuse me <unk>.
Is that business is right now light weighting is more important our products are in the suspension and chassis area. So I feel very good about our product portfolio unquestionably, we do have positions in ice focus whether that be some of the extruded product or our direct injection business.
Ironically, we see the direct injection business getting a lot stronger as they try to make these engines more powerful.
While they're reducing the emissions along the way so when we think that will buck the trend in the ice space, but as adoption increases, but it is still an ice applications. So that's been our story line when people look at our business and we are talking heavily to the domestic companies in terms of dollars, but we sell into certainly into <unk>.
Tesla, we sell into Chinese companies as well, so it's not always easy to know.
We're one of these products ends up.
Alright, we don't really know every time, we ship GM, what's going on the bolt.
For example, so I think that that's the point I want to make with more granularity now.
Much of this stuff we're quoting today.
Is where they are trying to compromise.
Customers.
Our trying to communize parts.
<unk> platforms. They don't know how many of a particular platform, they're going to make whether it's going to be internal combustion engine hybrid or.
Or.
Or an EV.
Could take a control arm or a steering knuckles aluminum cast that particular product.
It depends on how each cells.
I would I would argue that that product is really well positioned for the adoption whatever direction. It goes so that's.
Thats our strategy so in that sense, we're talking to all of the major domestic companies in terms of their <unk> expansion and we're certainly also talking to and servicing.
The pure be EVP, Paul like Libyan like Tesla and also some of them in China.
Really appreciate the detail thanks.
Thank you. Our next question is coming from the line of Sarkis <unk> with B Riley. Please proceed with your question.
Hi, Good morning, Thank you for taking my.
Thank you for taking my question here.
Good morning.
Yes.
Wanted to focus on.
The pricing initiatives to respond to the higher production costs and also the rising aluminum and rubber prices here at what point do you think you can catch up to pricing, we're effectively your margins or not.
Macrophyte anymore.
So let me let me begin by.
Sang and reminding.
Everyone that a lot of our business naturally.
Is able to reprice itself.
And what I mean by that is when I think about engineered products group for example.
Those whether it be in the <unk> business or in the equipment business those quotes and those jobs tend to turnover fairly quickly I won't say, there's no risk in supply chain and then inflation is certainly is but youre not signing a five year deal.
So in that sense that engineered products is to some extent insulated from some of those risks the spikes in some of these areas. It doesn't let anyone be insulated, but the reality of it is that business should be able to reprice more efficiently.
Much of our supply chain business.
<unk> is either non long term agreement smaller customers that are fairly easily re priced appropriately.
And then the remainder some of the large accounts often have indexing on raw material.
So.
The remaining 25, we'll call it percent of our business that is challenged.
And those tend to be not surprisingly disproportionally in the automotive sector.
Some of that we still have raw material pass throughs.
And we will benefit from that as.
The pricing catches up to the index, but theres a chunk of it.
That we've signed long term agreements that we need to negotiate meaning.
Meaningfully and aggressively too.
Stop the losses, so that's what we're in the middle of and.
It's hard to answer your question, but I do want to remind.
You that 80% of our business kind of <unk>.
Somewhat fairly within up within less than six months or within less than three months kind of re prices itself.
I think in the third quarter, we got the worst of all right. We got some of the business and that naturally reprice, we're upside down a little bit and I think that the ones that don't naturally.
Re price were at their worst moment.
So.
I think we will see meaningful traction, particularly on the material.
And the next 345 months for sure I think that recapturing labor is always more challenging recapturing margins always recapturing, but but I think again, we've seen a lot of our business, we re prices naturally and we will see that build momentum.
Into the into the new year.
Okay understood.
I will discussion.
If I kind of step back and then think about the three different business segments is there any particular end market that you see today.
Giving your excitement I know you've talked about the EV opportunity, but just wanted to kind of touch on the other segments as well whether it be engineered products our supply tech so.
Okay.
And then also.
To that.
What industry, maybe look a little bit challenging I know, you mentioned oil and gas rail, but any other industries that are maybe not obvious that that look challenging.
I'll make two quick observations and I'll give pat a minute to thank because there'll be smart.
So I'll tell you first of all I am thrilled I mentioned briefly that we are seeing a little pick up not just in oil and gas, but narrow space and rail those have lagged certainly not telling you anything you don't know so while everything else has been booming the problem for US is we've got a fair amount of an investment in an overhang.
Related to those businesses, particularly in our engineered products group, which is.
Often our highest margin business so to the extent that we see a little wind at our back on those markets the flow through on those incremental sales will be significant and meaningful so while we may not return.
Two.
Historic levels there, particularly.
Particularly in oil and gas in terms of the money, they're investing in that sector. I do think we're going to see one the benefit of incremental revenue, particularly in rail and aerospace as it rebuilds.
Outsides flow through and then I also think we're going to benefit in that business disproportionately on the restructuring because thats, where we did a lot of heavy lifting on the restructuring because guess what.
Oil and gas and the capital investment in oil and gas is never going back to where it was in our opinion, so we need to rightsize our business. So.
Those are industries that I know are kind of traditional.
Traditional not exciting new I will say.
And speak briefly in supply technologies I.
Mentioned.
Some of the enthusiasm excitement around new business and the strength in our small and mid size account business.
This is an exciting area for us because we do do very well with the large accounts.
Watching our sales organization its not really end market focused that business lends itself to assemblers are all industries that require a lot of pieces parts. Some less focus there to what answer your question by saying I'm not going to talk about end market there I'm going to talk about the idea that.
We're seeing a lot of new logos, we call on a lot of new names and not a new opportunity for the future and that reorientation of our sales team is very exciting and I think.
As I've said before $100000 account has that has that much of our Hollywood highly likelihood of turning into a 1 million dollar account. Then you can go out and get a million dollar account.
So very exciting I will say and I mentioned in opening comments seeing some strength.
Capital equipment group out of alternative energy, particularly out of Europe is also really exciting as well so that's not new to us, but the strength in our positioning from a product perspective is pretty cool.
I think I think that covers.
Lots of their lifestyle.
Now to cover but I will I will like to comment on a couple of other areas I think within supply technologies.
The demand increases we're seeing on the aerospace side.
Hopefully we will continue to build momentum into 2022, that's exciting for us because of how low it's been.
Within that same segment, our spec product our fastener manufacturing business continues to penetrate Oems throughout Europe and Asia.
With many different applications.
At decent margins, so that is a very exciting.
<unk>.
Business for us as we head into 2022 and <unk>.
Just to add on the capital equipment side $60 million of new orders in the quarter Youll following up on a $40 million new order.
Level in the second quarter.
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Equipment that historically, we've had very high margins. This is not new technology as much as <unk>.
Induction hardening type capital assets that that our customers are investing and this is the type of equipment that we specialize in and should yield should yield higher margins.
So those are the things that.
In addition to what Matt said are exciting to me.
Great. Thank you for the comments there and then one final one for me I guess.
Just kind of looking at the updated full year outlook.
On the year it seems like EBITDA margins going to be approximately 5% I guess, if we look out and take into consideration. All the comments you have from this call from today's call and then kind of the trends maybe into even the first half of 'twenty two.
Would it be fair to say that.
As we look into modeling 'twenty two.
EBITDA margin should be better than 5%, but maybe below kind of the high single digit level that you've historically done or do you think you can get to the high single digit level what are your thoughts there initial thoughts.
I'm going to let Pat Pat answer that but I'm going to tell you. This is going to be a journey.
We are.
<unk>.
As I mentioned earlier pricing material is something we need.
Getting.
Paid for what we do and there's a lot of tough conversations we have to have to be sustainably, where we need to need to be in the business. So I don't think its going to be a light switch personally.
Yes.
Yes.
As you read.
The current situation with the semiconductor chip shortage in the various supply chain constraints that are out there.
It could impact demand levels at certain of our customers and thats. The unpredictability of of next year. When we will stabilize will stabilize by mid year and if that's the case then the second half of next year should should yield very strong results.
But it's a challenge to even try to forecast at this time.
Understood. Thank you for the comments.
Thank you we have no additional questions at this time, so I'd like to pass the floor back to management for any additional closing remarks.
Well. Thank you for your questions today, we appreciate it.
It does not the call we had hoped to have or the results, we hope to have but.
I want to emphasize I think we're on the right path and we've got some heavy lifting to do in a portion of the business, but there's a lot of good things going on too. So I hope that came through and we appreciate everyone's patience.
And we appreciate everyone's investment and interest thank you.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
Okay.
Yes.