Q4 2022 Park Ohio Holdings Corp Earnings Call
Speaker 1: I.
Speaker 1: The C.
Speaker 1: I.
Speaker 2: 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.
Speaker 2: 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 and Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties.
Speaker 2: 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 the company's 2021 10K which was filed on March 16, 2022 with the SEC.
Speaker 2: Additionally, the company may discuss adjusted EPS, adjusted operating income, and EBITDA as defined on the continuing operations or consolidated basis.
Speaker 2: These metrics are not measures of performance under generally accepted accounting principles. For reconciliation of EPS to adjusted EPS, operated income to adjusted operating income, net income attributed to Park Ohio's common share.
Speaker 2: holders to EBITDA as defined please refer to the company's recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO . Please proceed Mr. Crawford.
Speaker 3: Thank you and good morning. We're proud of our accomplishments during 2022. Revenue growth from continuing operations of 17% helped us achieve record annual sales. And improved operating profit across all three business segments.
Speaker 3: As we enter 2023, our markets continue to be robust and we expect to achieve increased margins and profitability versus 2022, as well as a substantially improved balance sheet.
Speaker 3: This after 3 years of battling inflation supply chain and a myriad of other challenges. While our job is never complete, I want to highlight the incredible effort by our entire team in both restructuring much of our business as it relates to our cost structure. And also the ongoing efforts to achieve commercial terms.
Speaker 3: which addresses substantial inflation in the marketplace. These efforts continue, but much of the heavy lifting is now complete.
Speaker 3: Notably, during the year, we allocated approximately $27 million in capital to many of our most promising products and services, which will ensure future growth at accretive margins.
Speaker 3: Here I would highlight improved large forging capabilities, increased capacity for highly engineered fasteners, and expanded capacity in our rubber business.
Speaker 3: In addition, we added two small but strategic and creative acquisitions to supply technologies, which will both add new capabilities and customers.
Speaker 3: Challenges still remain. In particular, attracting and retaining skilled associates to the business during this period continues to be a challenge. But we have seen some modest stabilization and have begun to see the benefits of reduced overtime and other inefficiencies.
Speaker 3: We're also announcing the potential sale of our aluminum products business.
Speaker 3: This was a difficult decision given the substantial opportunities in front of them largely due to light weighting, electrification, and reshoring, which has begun to occur meaningfully within the auto industry.
Speaker 3: While the business has struggled to be profitable since the beginning of COVID, our investments there have caused it to, quote, turn the corner, and we have seen improved and stabilized performance recently. Despite these positives, we've chosen to invest in other opportunities in our business, which are demonstrating impressive growth opportunities.
Speaker 3: As we look into 2023 and beyond, we're particularly excited about a few trends we're seeing in our business.
Speaker 3: First, even as consumer demand may dampen due to increased cost and availability of credit, many of our customers desperately need to restock their supply chain or improve their manufacturing capacity or productivity, as evidenced by large backlogs in our engineered products growth.
Speaker 3: Second, we've seen evidence of reshoring by many of our customers.
Speaker 3: While this has been a storyline for years, we have recently received orders intended by our customers to reduce their reliance on foreign suppliers.
Speaker 3: Third, the green energy transition has benefited our European business during the last 18 months meaningfully. We anticipate whether it's electric cars, wind energy, or electric furnace technology, we will continue to benefit globally.
Speaker 3: Lastly, improved government spending and infrastructure and defense will accelerate the need for capacity in many basic industries like forging and steel making, which are areas where we will benefit.
Speaker 3: While we've had a challenging couple years, we're pleased with the progress we're making and want to thank all of our team, including the many new and talented people that have joined our firm recently and are making a big difference. With that, I'll turn it over to Pat. Stay safe and happy Well done Hey, um, I'm Matt
Speaker 4: Thank you, Matt. During 2022, we were able to achieve significant year-over-year improvement in sales and operating income in the majority of our businesses, despite inflationary and supply chain challenges, and believe we are positioned for further sales growth and improved earnings in 2023.
Speaker 4: Key highlights in 2022 included the following.
Speaker 4: First, we achieved record consolidated net sales from continuing operations of $1.5 billion of 17% year-over-year driven by growth in all three of our business sectors. Excluding continued operations, our full year adjusted EPS was $1.76.
Speaker 4: An increase of more than 300% compared to adjusted EPS of 42 cents in 2021.
Speaker 4: We implemented significant customer price increases throughout the year to offset product inflation and higher operating costs in every business.
Speaker 4: We expect these actions will improve operating margins in the current year.
Speaker 4: We substantially completed our facility consolidation activities in our assembly components and engineered product segments which impacted four manufacturing plants.
Speaker 4: We also started up a new rubber mixing facility and relocated several product lines and related operating assets, including a 50,000 pound forging hammer, which is now installed in our Canton Drop Forge Facility.
Speaker 4: We expect these actions will also contribute to improved operating margins in 2023.
Speaker 4: In connection with the consolidation activities, we sold real estate and other assets during the year for cash proceeds of $10 million.
Speaker 4: Over the past two years combined, cash proceeds from our acid sales totaled $30 million, resulting in gains of $17 million.
Speaker 4: We completed two strategic acquisitions in our supply technology segment in support of our initiative to expand our industrial supply and MRO business.
Speaker 4: and to accelerate the global growth of our proprietary self-piercing and clinch products in our fastener manufacturing business.
Speaker 4: And finally, during the fourth quarter, we made the strategic decision to exit our aluminum products business. And on December 30th, we signed a memorandum of understanding with a third party to acquire the business. Pursuant to the MOU, we received $20 million and a promissory note in the amount of $25 million.
Speaker 4: representing a portion of the final sale price. The sale of the business is subject to various conditions, including the final execution of a purchase agreement.
Now I'll review our full year and fourth quarter 2022 results in detail.
Consolidated net sales from continuing operations in 2022 were $1.5 billion, up 17% compared to $1.3 billion a year ago, with higher year-over-year sales in all three of our business segments. We estimate that 70% of the overall increase was driven by volume growth.
from higher customer demand and new programs, while the remaining 30% was due to the impact of customer price increases achieved during the year.
Gap EPS for the year was 83 cents per diluted share. Adjusted earnings per share, which excludes primarily one-time non-recurring items related to planned closure and consolidation costs, improved significantly year-over-year to $1.76 per share.
compared to adjusted EPS in 2021 of $0.42 per share.
Excluding plant closure costs, 2022 adjusted gross margin was 14.1% compared to 13.9% in 2021.
SG&A expenses were higher in 2022, due primarily to the higher sales levels.
higher employee related costs, and unfavorable foreign currency exchange impacts. Our 2022 adjusted operating income was 48 million dollars or 3.2 percent of sales compared to 22 million dollars or 1.7 percent of sales in 2021.
Significant improvement in operating income was delivered in each business segment, most notably in our engineered products segment, which improved year-over-year by $22 million. Interest expense was $34 million compared to $27 million in 2021, with the increase due to higher interest rates.
and higher outstanding borrowings in 2022.
These amounts exclude approximately 2.5 million dollars in each year that has been allocated to this continued operations.
Our full year income tax provision was a benefit of $700,000 on a gap pretax income of $10.7 million.
The benefit reflects the positive effects of tax planning initiatives, which include an increase in federal research and development credits during the year.
For 2023, we estimate our effective income tax will range from 23% to 25%. We ended the year with $180 million of liquidity, which consisted of $58 million of cash on hand and $122 million of unused borrowing capacity.
under our various banking arrangements, which included $12 million of suppressed availability.
During the fourth quarter, free cash flow, including cash proceeds of $6 million from asset sales, was the use of a million dollars.
As we have discussed on recent calls, strong end market demand and supply chain challenges have resulted in additional investments in networking capital.
compared to historical levels. We estimate the excess working capital to be approximately $50 million.
During the fourth quarter, we reduced networking capital by seven million dollars.
And over the next 12 to 18 months, expect further reductions in net working capital days resulting in significant improvement in free cash flows year over year.
With respect to our aluminum products business, which is now classified as discontinued for financial reporting purposes, we reported a net loss for the year of $24.3 million, which was driven by losses incurred on a product line that we exited in mid-year.
non-cash charges for idle assets, and startup expenses related to our plan in Mexico.
A significant portion of these losses were non-recurring and non-cash related. For the year, the business used cash in its operating activities of $1 million and had capital expenditures of $3.6 million.
Moving now to our fourth quarter results, net sales from continuing operations of $382 million. We're up 17% year over year compared to $327 million in the prior year.
driven by strong year-over-year customer demand across all three of our business segments. Gap EPS for the quarter was a loss of 58 cents per diluted share.
Adjusted EPS, which excludes primarily one-time non-recurring items, was a loss of 9 cents per share.
The 9-cent loss in the fourth quarter included two unfavorable tax items consisting of a valuation allowance against foreign tax credits of $1.8 million and other adjustments to previously recorded estimates.
which together negatively impacted the fourth quarter by 26 cents per share.
In addition, our fourth quarter results included an unfavorable foreign currency impact totaling 10 cents per diluted share.
Turning now to our segment results in Supply Technologies' 2022 net sales for the full year were a record $712 million of 15% compared to $620 million in 2021.
Average daily sales were up 14% year over year as we saw strong customer demand in most key markets.
with the biggest increases in the heavy-duty truck, power sports, agricultural industrial equipment, semiconductor and civilian aerospace and markets.
In addition to increased customer demand and improved pricing, sales in the current year also benefited from the acquisitions of Southern Fasteners and Charter Automotive.
Operating income in this segment totaled approximately $46 million in 2022, up 7% compared to $43 million in 2021, driven by the higher sales levels.
Operating margins were 50 basis points lower year over year and were impacted by higher supply chain costs, primarily important domestic print related and sales mix.
In the fourth quarter of 2022, net sales of $181 million were up 18% compared to $153 million in the fourth quarter of 2021, and operating income was $10 million in each period. In our assembly component segment, which now excludes
aluminum products business, sales were $389 million for the year, up 21% compared to $322 million in 2021, resulting from sales on new programs launched and increased net price realization, which helped offset product inflation and other increased costs in this segment.
flow through from the higher sales levels, price increases and benefits from profit improvement initiatives in this business.
In the fourth quarter, net sales of $95 million were up 13% compared to $83 million in the fourth quarter of 2021. And adjusted operating income improved $5 million year-over-year to $2 million in the quarter. In our engineered products segment, 2022 sales were $393 million.
$201 million, an increase of 9% compared to 2021 levels.
Our new equipment backlog as of December 31st was $163 million, 35% higher than a year ago, and demand for our aftermarket parts and services continues to be strong. In our Forged and Machined Products business, full-year sales were up almost 30% and at their highest levels since 2019.
driven by strength in several key end markets, including the continuing recovery of the rail, oil, and gas, and aerospace and defense markets.
Excluding charges related to plant consolidation activities, our adjusted operating income for the year was $23 million compared to $1 million a year ago. With a significant improvement driven by profit flow-through from higher sales levels, implemented operational improvements, our reduced profit loss, plant loss, complianceagain, loss United States' PPAs in Tech Energy.
the benefits of plant consolidation actions, and other market enhancement initiatives. We will complete the consolidation of our crop forage business in the first half of this year and expect to incur costs of less than $2 million to finalize the project.
In the fourth quarter of 2022 net sales of $106 million were up 17% compared to $90 million in the fourth quarter of last year.
adjusted operating income was six million dollars in the quarter compared to a loss of $100,000 a year ago.
Corporate expenses were up $3 million in 2022 due to higher employee related costs and professional fees related primarily to tax planning initiatives implemented during the year.
And finally, looking into 2023, we expect year-over-year revenue growth of approximately 5 to 10 percent.
The revenue growth will be driven by strong demand and supply technologies in most end markets.
from improved product pricing and increased volumes in assembly components, and from the strong backlogs and increased productivity in our engineer product segment.
In addition, we expect year-over-year improvement in adjusted operating income, EBITDA's defined, free cash flow and adjusted EPS in 2023 driven by the sales growth.
benefits from the plant consolidations completed over the last two years, and other implemented margin improvement initiatives across each business segment.
Now I'll turn the call back over to Matt. Great, thank you very much, Pat. We'll now take some questions. Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question is from Ilma Abbibi with J.P. Morgan. Please proceed.
Thank you and good morning. Good morning. My first question is on the aluminum products asset sale. I guess firstly, can you put us in context for us, what was the relative revenue contribution in 2022, EBITDA if you have it, so that we can model it going forward appropriately?
Yeah, approximately 200 million Yoma is the revenue.
And the EBITDA, as we define it, was a loss of approximately $12 million.
Okay, great, thank you. In terms of the business, was it a standalone in a business within the portfolio? Are there friction costs in terms of separating the business from the rest of the enterprise?
This is Matt our automotive segment assembly components is really grouped into two businesses. 1 is our assembly components division, which includes most of our rubber business and some other companies as well. And then general aluminum, the aluminum products.
So, the general products, which is the 200M dollar piece is a standalone business. So, no, it is not incorporated deeply inside of the rest of the business, either Park Ohio or the rest of the automotive business, which we are retaining.
Okay, great. And then I guess looking forward to 2023, free cash flow expectations of $40 million. Just so that we have apples-apples comparison, is this sort of when you think of free cash flow, you know, for 2022, the comparable number, you know, cash from ops, less capex, I'm getting about $54 million.
a press release of $40 million.
excludes any transaction related to our aluminum product segment.
So I think that will at least give you an apples and apples comparison. And then in the current year as laid out in our cash flow statement, you'll be able to see the free cash flow. That referenced $27 million of CapEx.
during the period and then obviously there was a use of cash from operating activities relative to the increase in working capital that we've seen in the business.
Okay, so to be clear though, the free cash flow as you see it in 2022 comparable to this $40 million forecast for 2023, that's sort of going from 54 to plus 40, is that correct? That's correct. Minus 54 is plus 40? That's right. Okay, great, thank you. I guess maybe- Well, I would just give context.
So, you know, we made tremendous investments in the business at a time where we were not very profitable.
So, you know, I think 2023 as we look forward is a lot about, you know, generating cash as a business and harvesting some of the working capital that was a little bit excess based on shoring up supply chains and so forth. So, you know, I think there's some opportunity here on the free cash flow side.
growth what I'll call stabilizers. To metabolize 300 million dollars over 24 months or more is a lot.
I think you partly answered sort of my last follow-up question on the free cash flow. And that is sort of, I guess, a bit of a bridge. It sounds like some of it is going to be driven by revenue increase and the rate of profitability. A lot of it appears to be working capital coming back. If you're ready maybe to help us in terms of the relative size and what it is.
that recovery or the harvesting of that excess working capital to cash will not occur overnight. We estimate that that will occur over the next 12 to 18 months as supply chain stabilizes, as further reductions in supplier lead times take place.
Recovery or the harvesting of that excess working capital to cash Will not occur overnight We estimate that that will occur over the next 12 to 18 months as supply chain Stabilizes as further reductions and supplier lead times take place
and you know I think clearly that'll happen over 12 to 18 months. The additional working capital needed to grow our business into next year depends on the business segment but in general if you use
25 to 28 percent of every new sales dollar is invested in working capital. I think that's a good starting point and then consider the the harvesting of the $50 million over the next 12-18 months.
Thanks very much. That's all I had. Thank you. Thank you.
Our next question is from Dave Storms with Stonegate Capital Markets. Please proceed.
Morning gentlemen and thanks for taking my call. Just wanted to kind of start on backlogs. I know last quarter you mentioned you were looking at probably about six to nine months of backlogs. Has that kind of shortened up a little bit or what's the color that you're seeing there?
No, no activity again, our capital equipment business, which is what we're referencing data is, is what we're talking about when we allude to those backlogs. You know, most of the rest of the business, the non equipment businesses is shorter term.
sort of visibility. So, when we refer to the capital equipment business in the backlogs, they've continued to stay strong. The order book continues to be a bit lumpy, but in general the order book and the order interest continues to be strong.
And again, I would point to while there may be some fears of a recession. I would point to the fact that the manufacturing sector in the United States has been massively under invested in. And as they're looking at some of the mega trends I mentioned in the 1st part of my. Comments, particularly as it relates to infrastructure and defense.
We're under invested as a country, so I think we're going to continue to see investments and upgrading the capacity and the productivity in the base. So it may be choppy and may be influenced a bit by by credit. But in general, I think we're seeing some positive trends.
So that's actually a good segue to my second question here. I'm sorry to hear some mumbling.
Other people seeing funds related to the inflation adoption act start to trickle into the market Is any of that expected to get to to you guys at Park, Ohio and that give you any visibility into 2023? I agree. I believe that any of the funds that might make it to you.
I think it's a great question and I wish I had a better answer. The answer I would tell you what I would give you is Trickles the right word. I don't think there's a ton of visibility and how that money is going to be spent at least where we are in the supply chain. I will say certainly large defense contractors and other large
government suppliers are certainly, I'm certain, having discussions at that level of how to invest these dollars. So there are some very strategic conversations going on between ourselves and some of the kind of household name manufacturers around increasing capacity for them, for with our equipment.
For us to support them and and I think it's very real and then layer on top of that some of the reshoring. That we're seeing motivated by the infrastructure bill and the inflation. We're, I mean, there were continuing to see. I think a need for more American manufacturing, so I wouldn't say that that.
our visibility is great. It's probably baked into the backlog a little bit on the equipment, but I don't know that... I would call it more trickling. Visibility is still weak, but the anecdotal evidence of the type of conversations we're being had would suggest that it's on its way.
That's very helpful. Thank you. Our next question is from Steve Barger with KeyBank Capital Markets. Please proceed.
Thanks, morning. You said the $20 million received and the $25 million promissory note is a portion of the sales price for the aluminum business. Any more details you can provide on what that total sales price could be.
Yes, Steve, I really can't comment right now. We're in the middle of the process and so I can't comment and won't comment until we have a definitive agreement in place.
But to reiterate, the $20 million in cash and the promissory note was a portion of the
of the anticipated sale price of the business. Understood. And this looks like it should be nicely deleveraging, which is great. You expect improving cash flow. I know you put the initial $20 million to the revolver. But with the bonds trading at a discount, is there any thought to allocating capital to take advantage of that?
You know Steve, we historically have purchased the bonds. We expect the proceeds on any sale to de-lever the company and reduce our net debt. And we'll be flexible to different ways to do that.
But we agree it will be a deleveraging event and we're going to give ourselves the flexibility to be open to reduce bank debt or buy back the bonds if there's an opportunity to do so.
Got it. Okay. And, um, you know, I know it's not a done deal yet, but with.
Okay. And, you know, I know it's not a done deal yet, but with, you know, at the end of the day, you know, we're going to have to do a lot of work
When that closes, Matt, what does your focus turn to? What becomes the next priority? I know you referenced a few things, but how are you thinking about this once that's off your plate? Yeah, that's a great question, Steve. And what I wanted to articulate in opening comments, and I did it, but thanks for the opportunity to revisit it. We haven't stopped focusing on what we think are some of the great opportunities in the business. And to be honest with you, I think that's a great question.
into the prior caller's question about infrastructure and so forth and defense. You know what we're doing on the engineered fastener side you know how much we like that business and adding capacity through the acquisition we did last year or incremental capacity which plays right into electrification is awesome.
So, you know, our first area of focus is going to be continuing to feed those parts of our business that will get an unfair share of our capital as we see them grow at super accretive margins. And I would say that the other thing we're focused on is getting TOAS Black Picture andCat Productions.
We haven't not been focused on it, but last year was about addressing supply chains and keeping our customers satisfied. You know, we're going to pivot back to the balance sheet, so we're going to give that an undue amount of attention this year in an effort to with or without the sale. Candidly to reduce our leverage and position ourselves.
well to continue to invest in these businesses.
you know if we can grow over a couple years approaching 20% with You know or more. I'm sorry more than that You know 25% 30% and do it in these kinds of products
That bodes really well for our trajectory both in terms of margin and candidly the kind of business that people should want to invest in.
So, I think we've got in front of us the things to do in the backdrop. Will we continue maybe to see an opportunity for an acquisition? Yes, we within our DNA. But but I would put that third on the list of the of the things I've mentioned.
Got it. And I know that you guys did a lot of hard work on pricing actions to offset inflation last year. And I think, Matt, when you said the heavy lifting is done, it was in reference to that. For the growth of 5 to 10%, can you talk about what your expectation is for price versus volume in 2023?
Yeah, you know, it's interesting. I, I, I really probably met the restructuring more than the pricing to be quite honest. But but I would tell you on the pricing side, I think in general with some exceptions, but in general. Those areas that were disproportionately and materially damaging our company.
Particularly in the continuing operations we've addressed. So, I think that a lot of those tough conversations have been had. That is a work in process because the market is a work in process.
So as I've mentioned on prior calls, I think in many cases raw material was addressed early in the inflationary environment to a lesser extent permanent and significant changes in labor costs have not been addressed.
So, no, I think that there is a daily list of opportunities that we continue to work through to identify opportunities where we're not getting paid for what we do. Because of how how the marketplace has changed where we have not recouped our costs. But I would say that.
You know, those, those corners of the business where we were seeing things that were more catastrophic that burned through the P and L over the last 18 months. I think largely those have been addressed. But, but our work's not done there. So, the restructuring feels like it's, it's mostly done that piece until inflation moderates completely that work is never done.
Understood. That's great detail. Thank you.
And we do have a follow-up question from Dave Storms with Stonegate Capital Markets. Please proceed. Good afternoon, everyone.
Hey, thanks for taking my follow-up here. Just hoping you could give us a little more color on the M&A market that you touched on how that's currently going to be a backdrop for you, but just with the aluminum products I said was that more of an opportunistic buyer or is this a good time to be a seller? You know kind of what are you seeing in you know the external growth fund? Yeah well I'll touch you at a high level on general aluminum.
mentioned it is a you know we've you know we've got so many opportunities I think we had to make some strategic decisions given the growth we're seeing on where we want to allocate our capital and and and we felt there are some good strategic buyers in the marketplace who can do well with that business
as well as we can. So it became, I think, an obvious place to try and harvest some money.
well as we can so it became I think an obvious place to try and try and harvest some money. That's very helpful, thank you.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
Great, thank you very much. I know that there's a lot of noise so to speak in these comments in this press release but I hope what has been taken away from this call is that we feel as though we're on the backside of COVID finally so to speak. We feel as though we've got an opportunity to really...
begin to benchmark against what we were doing pre-COVID in 2019. We certainly hope and anticipate that the general aluminum business deal will go through, but we're prepared either way to move forward with a solid business plan there. In the meantime, again, we didn't take any time off.
conference you may disconnect your lines at this time and thank you for your participation.
and thank you for your participation.
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