Edward Crawford - Chairman and CEO Matthew Crawford - President and COO

Ken Newman - KeyBanc Capital Markets Jay Harris - Axiom Capital

Good morning, and welcome to the Park-Ohio Third Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, the Company will conduct a question-and-answer session. Today’s conference is also being recorded. If you have any objections, you may disconnect at this time. Before we get started, I would like to remind everybody that certain statements we made on today’s call maybe forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. A list of relevant risks and uncertainties may be found in the earnings press release as well as in the Company’s 2014 10-K that was filed with the SEC. Additionally, the Company will discuss as adjusted earnings and EBITDA. As adjusted earnings and EBITDA not measures of performance under Generally Accepted Accounting Principles. For a reconciliation of net income to as adjusted earnings and for a reconciliation of net income to EBITDA as defined, please refer to the Company’s third quarter earnings release. With no further ado, I would now like to turn the conference over to Mr. Edward Crawford, the Chairman and CEO. Please proceed Mr. Crawford.

Thank you. Good morning, ladies and gentlemen, to Park-Ohio’s third quarter 2015 conference call. I have with me today Patrick Fogarty, the Chief Financial Officer and Matthew Crawford, President and COO. Matt I’d like you to cover the activities for the third quarter.

Good morning everyone. And thank you for joining us this morning. We’re pleased with our results for the third quarter and excited that we set three new Company performance records as of the end of the quarter, September 30. First, we set a new record for nine months revenues, $1.1 billion, a new record for nine month EPS of $3.04 as adjusted and a new EBITDA record of $104.4 million for the first nine months. We attribute these records for our strong diversified portfolio businesses combined with our ongoing expense control in the face of continuing challenges in some of our end markets. Our U.S. GAAP earnings in the third quarter of 2015 of $1.06 compared to $1 in the third quarter of 2014 and the second quarter of 2015. Our as adjusted earnings for the third quarter of 2015 was $1.07 per share compared to $1.15 per share in the prior year and we’re up $0.03 compared to the second quarter. EBITDA as defined was $36.9 million in the third quarter compared to $35.8 million in the third quarter of 2014, and $34.1 million in the second quarter of 2015. Let’s begin our detailed discussion of third quarter results with revenue. Net sales increased 6% to $364.4 million compared to $344.6 million in the prior year. The increase in net sales is attributable primarily to the 2014 acquisitions of Autoform and SAET. Gross profit earned in the second quarter was $62.3 million compared to $60.6 million in the third quarter of 2014. The gross profit margin was 17.1% in the third quarter compared to 17.6% last year. The decline in gross margin is largely due to the continued margin impact of lower aftermarket new equipment sales in our engineered products group, as the demand from our oil and gas and steel customers continues to be at very low levels. On a sequential basis, our gross margins improved significantly from 16% due to improved margins in our assembly components segment which we’ll discuss later. Consolidated SG&A expense of $34.9 million are up slightly compared to the prior year, but SG&A expenses as a percent of net sales improved to 9.6% versus 9.9% last year. The improvement in SG&A as a percentage of sales as a result are reduced to professional fees and lower SG&A costs as a percentage of sales from acquisitions. Interest expense increased by $500,000 to $7 million in the third quarter, compared to the third quarter of last year due to an increase in average borrowings to fund our late 2004 acquisitions, and current year CapEx and working capital needs. Our effective tax rate for the third quarter of ’15 was 35.3% compared to an effective tax rate of 37.2% last year. We estimate our 2015 full year effective tax rate to be approximately 35%. As we discussed on previous calls, the effect of foreign operations and the current year conversion to U.S. dollar has affected our business. We estimate that our year-to-date 2015 budgeted revenues were unfavorably impacted by $23 million year-to-date in 2015 and net income year-to-date was unfavorably impacted by $1.4 million or $0.11 per share from the effective currency changes since last year. Now I’ll look at the segment results. Supply technologies revenues represented 39% of consolidated revenues during the third quarter. Revenues were roughly flat from the prior year and total approximately $143.1 million. We continue to see strong demand in automotive, heavy duty truck, semiconductor and power sports. While revenues from other end markets, such as HVAC, agriculture and EDMC were down. Given the current environment, we’re monitoring closely the production schedules of our customers for the remaining business days of 2015 and we’ll continue to manage the effect of lower commodity pricing on the business. Segment operating income increased $800,000 or 6% from the third quarter of the prior year to 13 million. Segment operating income margin was 9.1% for the third quarter of 2015 which compares favorably to last year’s third quarter segment operating margin of 8.5%. This improvement was driven largely by improved operating leverage and strong execution in our facilities that service heavy duty truck and auto related customers. Now let’s look at the assembly components segment. Assembly components revenues for third quarter represented 41% of consolidated revenues. Net sales increased $27.7 million or approximately 23% to $149.3 million in the third quarter of 2015 compared to 2014. Approximately $16 million of this growth is attributable to the Autoform acquisition and the remaining increase is attributable to our aluminum business and the strong continued performance at our fluid management business. Business conditions continue to be strong in this mostly automotive segment and we continue to quote actively in fluid delivery and gasoline direct injection systems, rubber and plastic components and aluminum products both here and abroad. In the third quarter of 2015 segment operating income grew $6.7 million to $17.7 million which was a significant improvement over the prior year. Segment operating income margin in the third quarter of 2015 was up 32% at 11.9% compared to 9% last year. Much of the improvement is a result of the long awaited improved performance at General Aluminum as well as the Autoform acquisition which is performing well and monthly revenues are expected to continue to increase based on business previously awarded. Now let’s talk about engineered products. Engineered products revenues represented 20% of consolidated revenues. Net sales decreased 9.5% to $72 million. Our equipment business continued to be affected by low aftermarket demands and low net margins on equipment builds. Low demand from our oil and gas, tubular steel and military aerospace customers continue to be challenging. Specifically our aftermarket business declined 19% in the third quarter and 12% year-to-date compared to last year. Within the aftermarket product line, oil and gas aftermarket product sales declined 51% compared to the third quarter of the prior year and 26% for the nine months period. Equally challenging was our [forging] business during the quarter as revenues declined 13% due to weak military and mining demand as well as significantly reduced locomotive build due to recently changed emission standards. Segment operating income decreased $7.2 million to $4.3 million compared to the prior year and decreased $900,000 compared to the second quarter. In addition segment operating income margin decreased to 6% in the third quarter compared to 14.4% last year. The weak demand pattern for oil and gas, capital equipment and aftermarket products continue to significantly affect this business segment. We are working aggressively to reduce costs and implement operational improvement as we manage through this extremely tough environment. Next let’s discuss cash flows for 2015. During the first nine months of 2015 net cash provided by operating activities was $11.7 million after funding working capital for our growing supply technologies and assembly components businesses. In addition, we invested 31.1 million in equipment to fund future sales growth primarily in our assembly components segment. We expect cash flows from operating activities for the rest of the year to be strong as strong earnings continue and working capital was reduced. We estimate full year operating cash flows will approximate between $45 million and $50 million. Net CapEx are estimated in the range between 35 million and 40 million during 2015. Cash taxes are estimated to be at $20 million for the year. Overall we are very pleased with our third quarter performance. We continue to execute our growth strategy which includes international expansion, introduction of new products and continued investment in the highly engineered and proprietary solutions. As we forecast our financial results for the remaining part of 2015 we believe the continued headwinds related to several key end markets in our engineered products segment will persist and the demand on non-automotive end markets in our supply technology segment could soften slightly below our original expectations. As a result we are adjusting our previously stated guidance range down to $4.1 to $4.12 on an adjusted basis. Thank you very much.

Well thank you Matthew and now I would like to open the conference call lines for questions from our attendees.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Steve Barger at KeyBanc Capital Markets. Mr. Barger please proceed with your question.

Hi, good morning gentlemen, it’s actually Ken Newman on for Steve. So first on supply tax, it put a flat revenues this quarter. Is there any end market leadership change which would have a big impact on margins either positive or negative there?

This is Matt speaking. No, I would not define it as a change in leadership. The leadership in that business continues to be while automotive isn’t a huge part of the business, continues to be in automotive. Also, leadership continues in the heavy duty truck area which often provide a poor margin mix, but at particularly high volumes we do get some good operating leverage. So, no, I would not define leadership rotation as being an issue per se, I think we continue to be led by the areas we thought. I do think that the well documented uncertainty or even softening depend on who you talk to you in plethora smaller industrial industries both domestic and globally is seeping into our view of the business.

And then bringing up the international business. I mean how did international hold up to supply tech in Europe specifically, how are the contributions from the recent acquisitions?

We continue to be happy with the integration and performance in those acquisitions. Candidly or probably not exactly where we expected to be, but we’re pleased with where they are and how they’re contributing generally at supply technologies.

And so I guess to clarify then you’re not seeing any incremental weakness in supply tech from Europe or just Europe in general. Is that right?

No, I think Europe has held up pretty well.

And then for assembly you have some nice margin there, is that more of a function of mix or I guess can you split out any benefit you’re getting from operational initiatives at plant level? And maybe also talk about the sustainability of that margin.

This is Ed. The assembly component's is doing very well, the number speak for themselves. We’ve been expecting for some time it’s been well over two years, we’re finally getting the absorption in revenues and the input to our manufacturing facilities. These five plants are underutilized for a period of time when we’ve ramped our platforms that is clearly the case now. We are very-very pleased that that part of the business, the auto part of the business is very-very strong. The other components of that are also in areas that we are enjoying gas injection as pointed out as well as turbo charging hoses. So, it’s a good time to be in the auto industry, looks very strong. We’re open to product and sales in China with the GM. So a lot of good things are happening there. But it’s very robust and quite frankly in some cases the platforms have outperformed what we expected to. We see that continuing clearly through the end of this year or hopefully into next year. But that is a very important part of why we’re able to this year and we talk about silos here, three silos. Clearly, the engineered products is on a weak foot when you are in the gas and oil business and aerospace and steel that of course all those segments are down. But the other hand the assembly components is doing a terrific job along with supply technology. So when we talk about the Company as a diversified industrial Company with three separate operating silos, we’re talking about diversification of customers, international sales. So we’re very-very proud of this being an example again where there are two silos, they’re clearly meaningful to make a deficit, a very deep hole, in our most profitable historical business which is the engineered product. So it’s great to have assembly components really robust and really moving at this time, it’s a long time and [indiscernible] it’s right here at the right time.

I would only add, this is Matt. That is a mostly automotive segment. Automotive is doing pretty well. And the results were very good largely because the intersection of getting our act together a little bit in general aluminum and candidly Autoform wasn’t in most of the results from the third quarter last year. So, it wasn’t in any of those. So, Autoform was a significant acquisition. It was built to be a business with significant backlogs that we expected to contribute on an accelerating basis. So, on a year-over-year comp basis, that didn’t even exit last year. So, I think that there is a couple nice story that put together add up and should be reasonably sustainable to the extent build stay where they are.

Moving on, I mean keeping on assembly, on prior calls you talked about having a less rational competitor in the pricing front. I think that’s changed. Can you talk through what you’re seeing now and how you’re reacting?

As we’ve indicated, a lot of pressure was being put on to pricing by private equity group, that company subsequently filed for Chapter 11 and is going through the process now and we feel over a period of time here a lot of those assets will go by the wayside, some will be sold but it’s all good for what we consider the competitive landscape to have people in it, they’ve been in it for a long time that are really operating people. So we are not happy for them or disappointed, we are just -- it works in our favor as it worked against us on the pricing model for two years.

I am sorry. Our next question comes from the line of Jay Harris of Axiom Capital.

There are several vertical markets that you referred to in the introductory remarks that are suffering cyclical depressions, mining, oil and gas. Are there others?

Jay it’s Matt. Steel, military …

Alright.

… to add a couple.

Alright. So.

I would say also agriculture which yes, so I would add a few.

Okay. What I would like to get is when you look at the aggregate of all of those vertical markets. How much were your revenues down in dollars year-over-year?

Well we -- the most significant shift -- I mean we don’t have that number but I would comment to you that in general the one that has provided the largest impact in the year-over-year numbers is oil and gas. And we’ve discussed I think the significant shift in aftermarket business which is our highest margin part of our business. And it has been material to our overall performance in the tens of millions of dollars as we’ve discussed.

So the reason I wanted to lump all those together and get a dollar aggregate number is because at some point in the future those markets will start to improve and it would give us a measure of the upside that you might be facing at that time. Is there any way you could put that number together and follow up with me?

Jay I am going to do it this way. I am going to make it terribly simple for you. Our engineered products segment is the segment that is damaged by every market segment that we just mentioned. So there is exceedingly large concentration 90% of the damage being done to Park-Ohio is in that segment. So if you were to take current performance which includes the Saet acquisition last year which is a positive. And look at the performance that we’ve seen in that business historically, either you could do a pretty good job of capturing the opportunity you are looking for.

Jay another pass at that would be for the first nine months the revenue in engineered products is [down] 18 million. That historically been our most profitable EBIT [silo] let’s say 14% type of EBIT 12% to 14% and when you take out 18 million with that kind of profit, just take 18 million and it’s 7.5 I am looking at the math, so 14 there is at least 6 or 7 points, so it’s 6 or 7 points, so it’s 18 million. That sounds like 16 -- it sounds like a lot of EBIT. Okay. So to your point this is why we like the company we are building. We are going to set record earnings again this year in both revenues and earnings. And we are dragging along the company or the [silo] there for the last five years of -- has been the whole company relative to 14%, 15%. So when you take on a whole of 18 million in nine months with that type of margins and still accomplish what we are talking about, it says the rest of the company is going very, very strong. I would like one day and I agree it is going to come back. And anybody that thinks that the oil and gas opportunity, the agricultural opportunities, the Caterpillar is not coming back, John Deere is not coming, oil and gas is not coming back, and all the steel companies, all that money spent in all markets is all going to stay down, okay. And we didn’t expect anything from this segment because we knew as early as June of last year what was going to happen. But it’s going to come back, it will start coming back with parts and it will start coming back with equipment. And when that comes back I hope the things that are really booming now auto for us and recreation vehicles and all these other company things that are adding to our revenue and our earnings and allows us to pick up a really major setback here. But it will be back. These companies are not going out of business. We have a loss market share they are just sitting there and they are coming back. When they come back it’s party time.

Our next question comes from the line of Steve Barger at KeyBanc Capital Markets. Please proceed with your question.

So I guess you touched on it a little bit, and I know you don’t want to give guidance for ’16. So I am just trying to get directional sense here. If prices for oil stay where they are and CapEx budgets remain under pressure it’s going to be tougher [engineering]. But if that happens, do you think you could drive enough organic growth in the other two segments to still put up a positive organic number for the Company?

Well I'll give you two answers to that. Number one, you probably have noticed our capital spendings been very high this year. We haven't announced an acquisition year-to-date but we have made substantial investments in CapEx to grow around new orders, new business. So when you start spending $40 million in CapEx I would hope that it’s all not maintenance and it's for business going forward and that’s exactly what it’s all about. Obviously we can't give you any guidance but let’s go back 8, or 9, or 10 years, and everything would indicate that next year I have no reason to believe that we’re not going to have increased sales and increased EBITDA, that’s what we’ve been doing and that’s what we continue to do and that’s what it’s all about [indiscernible] because some of these units will help, things will be better.

And then just one more from me, the question is on deal multiples, specifically for the oil patch, but I guess also across look forward trailing 12 months EBITDA will be coming down for a lot of these companies. Have you seeing that being reflected in the multiples yet?

Let’s put this way and start with the oil patch, any good company in this business three or four years you get 15 times EBITDA, well that same thing is four right now. So you have to be careful here where you think you get a bargain but multiples are again being driven by private equities access to very low capital and that sooner or later will come to an end hopefully. But we will not historically and we’ve done 86 acquisitions here pay up for Company, number one, any acquisition we make has to grow as fast as the rest of the Company is growing even faster and we think we've got a great Company and I think we’re proving it this year we haven't done an acquisition this year and we’re still firing on all cylinders we look forward to 2016. So acquisitions we love them but we also have turned our attention to organic growth. We want to spend $40 million in CapEx buying equipments and getting ready for the future.

Our next question comes from the line of Jon Bon, a Private Investor. Please proceed with your question.

Most of the questions have been answered but I guess my question takes us kind of on CapEx. Is this $40 million, is this going to be a new level that you’re kind of front end loading this, and how does that look compared to like depreciation and amortization going forward?

Jon this is Matt. We’re not in a position to forecast next year. It is as you know because you’ve been around the business a long time, we used to have a pretty predictable CapEx number in $12 million neighborhood. The last several years obviously the size of the business and the nature of the acquisitions have put us in a position two fold, number one, I think that fundamentally we’ve invested in businesses that require a little more CapEx, we’ve invested more heavily in the manufacturing side of the business, not the supply side hasn’t grow. But those -- it require a little bit more CapEx, so I think just the scale of the business and the slight skew towards more manufacturing has elevated what has been that traditional number. But still nowhere near $40 million. I think what you’re really seeing is number of opportunities and disproportionately they’re focused in the automotive area and disproportionately they’re focused on two fundamental strategies that we are pursuing. The first is international expansion. We believe that regardless of the [NAFTA] production rates that our ability to attack what is a more significant share of a $90 million global marketplace, our ability to expand our manufacturing environment and sales and engineering environment globally, we have done a lot of that. So it’s been expensive I think to do that but I think the upside is dramatic relative to being a global supplier of these products. And we are seeing it in terms of the quoting activity and the awarded business. I am very proud of what we have done in Mexico and in China in particular. So I think that’s one. And second thing -- and once again those are costly, they are not necessarily permanent but they are costly, these are start-ups. Secondly, I would articulate that the nature of our strategy around emissions in our fluid management business as well as our well documented investment in General Aluminum to grow the business, to increase the ability to supply these aluminum parts that reduce the weight of the car that help meet the reduced -- the increased mileage requirements. Those are once again particularly aluminum in a minority part of our business but one in which we see opportunity that is CapEx intensive. So that piece once again I view as not permanent. So I do think we are significantly above the new normal this year given those two fundamentals I just outlined but I would also tell you that we are not a $12 million CapEx company anymore.

And just one more quick one I will toss to Eddie right here and then I will hang up and listen more. Eddie I know, I've walked the plant there with aluminum body with [Ford] I guess [150]. Can you just give a little bit more color I mean we get today the auto sales are at record high. How does that kind of correlate with the aluminum products and F150 the light trucks and autos also I guess going forward and looking at something new platforms? Thank you.

Thanks John. That’s a very interesting question. We have a strategy around the auto area. We are excited and Matt made it very clear which is interesting. We are talking about the cars around the world in China and elsewhere. We can compete with some of our products lines like the gas injection is important. Clearly there are fuel systems that they are already shipping in Shanghai as we talked about. So the strategy here is to not to continue to invest in the aluminum casting machining side of it, the thinking is let’s have more platforms on the cars rather than one big, big platform. So when you think about the aluminum casting which we talk about a lot but the gas injection for this -- up in the engine, the turbo charge hoses put us up in the engine, they have got these little four cylinders act like V8s that’s turbo charging, gas injections, emission, more miles per gallon, fuel filler systems, the gas tank and of course the castings for the knuckles and so forth. So we’ve got four of five really strong platforms across the board. So if the model numbers come done we are still -- if we keep getting more on the cars, we are going to move better. So we are not going to be hit by a slowdown, if it goes from 12 million to 18 million cars to 16 million or 15 million we don’t get hit as hard because we are on more platforms. At one time we are in platform on the car and that was aluminum knuckles and aluminum this and aluminum that, that’s over. We are talking about gas injection here, its very growth business. We take the turbo hard charging business, a growth business. I know it’s old fashioned but you can’t make enough turbo charge hoses these days and we are trying to make them in preplans. So let’s keep investing but instead of putting all our eggs in one part of the car we’re all over the car. And that’s the strategy and I think before we really balloon any other particular segment of the car that we’re in there, one product that we’re in today, we get something else to put on the car. So I want to thank everyone, I assume that Jon was the last time our queue list. I want to thank everyone, all the stakeholders that listened to this call indirectly or directly we’re working very hard. We are going to finish the year again. All indications are we will be up in revenue and up in sales and up in profitability and that’s the key. And then ‘16 I hope it’s getting boring but that’s where our goal is to increase revenue of the company and increase the EBITDA and hopefully the valuation of our stock. Thank you once again for your support and we look forward seeing you or talking to you in the spring. Have a nice day.

This concludes today’s conference. Thank you for your participation. And you may disconnect your lines at this time.