Edward Crawford - Chairman and Chief Executive Officer Matthew Crawford - President and Chief Operating Officer Patrick Fogarty - Chief Financial Officer

Christopher Van Horn - FBR Steve Barger - KeyBanc Capital Markets

Good morning and welcome to the Park-Ohio Fourth Quarter and Year End 2015 Results Conference Call. [Operator Instructions] Today’s conference is also being recorded. If you have any objections, you may disconnect at this time. Before we get started, I want to remind everybody that certain statements 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 relative risks and uncertainties maybe found in the earnings press release as well as the company’s 2015 10-K, which will be filed later today with the SEC. Additionally, the company may discuss as adjusted earnings and EBITDA as defined. As adjusted earnings and EBITDA as defined are not measures of performance under Generally Accepted Accounting Principles. For reconciliation of net income to as adjusted earnings and for reconciliation of net income attributable to Park-Ohio common shareholders EBITDA as defined, pleased refer to the company’s recent earnings release. I will now turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Good morning, ladies and gentlemen. Welcome to Park-Ohio’s 2015 report card review. I would like to turn over the call to Matthew Crawford, the President and COO of the company. Matthew?

Thank you very much and good morning. We are pleased with our results for 2015 and excited that we set several new company records as of December 31. We set new records for annual revenues of $1.5 billion, net income of $48.1 million, EBITDA as defined of $136.5 million, adjusted EPS of $4.17 and GAAP EPS of $3.88. We attribute these annual records to the strong performance of our supply technologies and assembly components segments as well as the late 2014 Autoform and Saet acquisitions, which were both accretive to our 2015 results. First, I will discuss our annual results followed by our fourth quarter results. 2015 sales increased 6.2% to $1.467 billion from $1.378 billion in 2014. We experienced both top and bottom line growth on our supply technologies and assembly components businesses due to strong demand from heavy duty truck, automotive, power sports and semiconductor end markets. But our engineered products segment continued to be affected by the continuing low demand from the oil and gas, tubular steel and military aerospace end markets. Our gross profit margins for the full year were 16.1% versus 17% in 2014. The reduced margin percentage is a direct result of the sales mix in our engineered products segment and the reduced demand from oil and gas to steel related products. As we previously discussed, the historical gross profit margins in these end markets are higher than our average gross margins, particularly in the aftermarket product and services. Full year consolidated SG&A expenses were $135.1 million in 2015 compared to $136.6 million in the prior year. SG&A expense as a percent of net sales was 9.2% in 2015 compared to 9.9% in the prior year. In the fourth quarter of 2015, we took a non-cash charge of $2.2 million related to a court judgment in the EBSCO case, which has been in litigation for several years. We expect to appeal the court’s ruling in this period. Interest expense increased $1.8 million in 2015 compared to the prior year to an increase in average borrowings to fund our 2014 acquisitions, which appeared right at the end of 2014. Our effective tax rate for 2015 was 30.4%, which was lower than our 2014 effective tax rate of 34.7%. The decrease in 2015 effective tax rate is a result of the recognition of certain foreign tax benefits. We anticipate we will continue to show an increase in foreign income in countries which have lower income tax rates than the U.S. statutory income tax rate. And therefore, as our non-U.S. revenues and related profitability continues to grow, we will see a lower effective tax rate. As we discussed on previous calls, the effective foreign operations in the current year conversion to U.S. dollars has affected our business. We estimate that our year-to-date 2015 budgeted revenues were unfavorably impacted by $30.9 million and our 2015 budgeted net income year-to-date was unfavorably impacted by $2.4 million or $0.19 per share from the effective currency changes since last year. Now, let’s discuss the fourth quarter of 2015. Our U.S. GAAP earnings in the fourth quarter of ‘15 were $0.95 per share compared to $0.86 per share in the prior year. Our as adjusted earnings for the fourth quarter of 2015 were $1.15 per share compared to $0.90 per share in the prior year. EBITDA as defined was $32.1 million in the fourth quarter of ‘15 compared to $31.7 million in the fourth quarter of 2014. Net sales decreased 6.9% to $347.4 million in the fourth quarter compared to $373 million in the prior year. The decrease is attributable to reduced demand in the oil and gas and steel industries as well as decreased demand from certain end markets in our supply technologies segment compared to the prior year, primarily in heavy duty truck, powersports and construction equipment end markets. Gross profit earned in the fourth quarter was $54.1 million compared to $56.9 million in the prior year. The gross profit margin percentage was 15.6% compared to 15.3%. The increase in our gross margin percentage was primarily due to the improved margin in supply technologies and in our general aluminum business and a continued focus on managing cost throughout the business. SG&A cost increase in the fourth quarter of 2015, as a result of employee severance costs incurred, is a one-time cost and added back to arrive at our as adjusted EPS. Now, we will look at the segments. 2015 supply technologies revenue grew 3.5% to $579 million from $560 million in the prior year as demand for heavy duty truck, powersports and semiconductor end markets was strong. During the fourth quarter, we began to see weaker demand from these markets as well as semiconductor and industrial capital equipments, which had an effect on supply technologies results in the fourth quarter as sales were down year-over-year $5.4 million. For the full year, segment operating income increased to $50.3 million, an increase of $7.8 million over 2014 operating income of $42.5 million. Segment operating income margin for the year was 8.7%, a significant improvement over the prior year of 7.6%. The full year improvement was driven by improved operating leverage and strong execution in our facilities that service heavy duty truck, powersports and auto-related customers. Segment operating income margins were 7.5% during the fourth quarter of 2015 compared to 7% in the prior year. Assembly components full year net sales increased 16% or $78.7 million to $569 million compared to the prior year. We are pleased with this growth, which is related to our ongoing initiatives around auto fuel efficiency and increased global penetration of our key technologies. Most notably, our investment into direct injection products, our commitment to light weighting using aluminum to displace arm and safety critical components and our additional investments in both China and Mexico to support our fuel systems hose and molding capabilities is clearly paying off. 2015 segment operating income grew $15.9 million to $57.9 million, which was a 38% improvement year-over-year. Segment operating income margin was 10.2% compared to 8.6% in the prior year. This improvement is a result of operational improvements and improved pricing on various products throughout this business segment. Revenues in the fourth quarter of 2015 were $139.6 million compared to $138.8 million or essentially flat over the prior year. Our operating margin expanded to 11.5% compared to 7.7% in the prior year. Now, let’s move to engineered products. Full year 2015 net sales decreased 3.9% to $316 million compared to $329 million in the prior year. Our equipment business continued to be affected by historically low demand for new equipment and aftermarket products and services throughout the year. Low demand from our oil and gas, tubular steel and military aerospace customers has been a challenge for the business throughout 2015 and we expect well into 2016. For the full year, 2015, the effect of the industry-wide slowdown in oil and gas, steel and military aerospace markets impacted our operating income by approximately $21.8 million. We continue to aggressively reduce costs, implement operational improvements and launch new customer initiatives as we managed through this extremely difficult environment within this particular segment of our business. Engineered products were $73.8 million in the fourth quarter of 2015 compared to $94.8 million for the same period of 2014. Operating margins declined 7% from 10.4% in the prior year as low volumes continue to affect our plans. Next, let’s highlight cash flows for 2015. Operating cash flows for the full year totaled $45 million. Net capital expenditures were $36.5 million. We invested a significant amount of capital and high return internal projects for assembly components segment, which will grow sales and enhance product margins in the future. Overall, we are pleased with our performance in 2015. Despite the headwinds we faced in our engineered products segment, the diversification of Park-Ohio was evident as other businesses grew in sales and profitability, which include international expansion, introduction of new products and continued investment in highly engineered and proprietary solutions. At this time, we would like to provide you with a revised outlook for 2016. We are concerned of the economic malaise, which intensified in the fourth quarter is continuing well into 2016. Continued weakness in engineered products, key end markets will also continue to be a headwind. On the positive side, generally strong automotive sales, combined with cost cost-cutting initiatives and new business launches mostly in the second half are all signs of strength. With that in mind, we expect consolidated net income per share for 2016 to be in the range of $4.05 to $4.23 per share. We are forecasting capital spending for 2016 to total approximately $35 million to $40 million, with the majority of the spending representing growth capital. We expect 2016 depreciation and amortization to be approximately $28 million and are forecasting our effective tax rate to be 33%. In closing, we are looking forward to another year of increased sales and earnings. While we recognized some headwinds that have been discussed above, we believe we are well-positioned to go across the company and once again achieve record results. Thank you very much.

Thank you, Matt. Great job. Well, 2015 was a very difficult year for most operating companies in the U.S. However, we are very pleased with our ability to continue our 7-year winning streak of posing increased revenues, increased EBITDA and increased earnings per share. Now, let’s move into the future, really the important stuff. For the first time in the company’s history, we did not complete an acquisition in 2015 primarily due to the fact that we felt that the premium prices being fostered by private equity firms, make it very difficult to acquire something with long-term value of a company that can grow at the same pace that the major company, the current company is, which has been wonderful. But we did switch to the concept of investing in organic growth to capital equipment. And you are really going to see the beginnings of the payback of that in ‘17, ‘18, and ‘19. The investment in the capital equipment around diversified number of our units, were selected, where we could imply additional dollars within a particular silo to create additional revenue and of course earnings. This is going to have a dramatic effect in the company starting in ‘17. There is a timeslot there when you acquire a company that exists. There is immediate earnings in the balance sheet. There is a long runway in setting up to do some of the exciting projects we have committed investments, but they will have a very, very wonderful impact again on the company over the next 5 or 6 years. We are committed to growth here at Park-Ohio. We intend to – and our goal primary to us is reaching that $2 billion run-rate as soon as possible. And we feel that we have the company that can do that or go beyond that number, because of our customers worldwide and the diversification of the business and more important, our customers that we are following around the world. Okay. Let’s open up the lines for any questions at this time.

Thank you. [Operator Instructions] Our first question today is coming from Christopher Van Horn from FBR. Please proceed with your question.

Hey, good morning guys. Congrats on the quarter. Great margins.

Okay, thank you.

Just a couple of questions. Could you – when you are talking about – it seems like CapEx is certainly ramping up compared to ‘14, and do you think about CapEx spend as a percent of sales or do you more look at it as growth opportunities you see within the business? And then kind of a secondary of that is the investment mix that you are seeing from an end market perspective similar to what your revenues breakout as in terms of what end markets you are addressing in your growth CapEx?

Well, as we have talked in the past, Chris, it was clear in ‘14 that we were not going to be able to do any real acquisitions along the lines that we are committed to and we have a long history of being very prudent buyers here at the company. We have done some 86 acquisitions since we came in 1992. And we will just not overpay for companies, particularly at the numbers 8, 9 multiples. So absent that opportunity, we put together and brought – ask everyone from every silo bring in their growth plans and where they would invest money within their organization and offer the best plans. And we spent a couple of weeks looking at this. And one-by-one, we determined the ones that were long-term in nature, for example, 10-speed transmission starting up in the aluminum division, which is a contract that’s a 10-year contract, but it’s a substantial CapEx. So, we really aimed the CapEx at the growth potential within each silo. And we took the best opportunities and yes, but think of it this way, the way we look at it, if we spent $25 million or $30 million or $35 million, it’s like making an acquisition, but the differences with organic growth, number one, you have to make the investment, order your equipment, get it up and running and we are talking about forging lines and all types of very sophisticated equipment. There is a long runway. It takes 2 years minimum from the day you receive the order till you start getting any revenue, but the margins are higher. The margins are higher than – quite frankly than it would in even good acquisition. So, this is not a knee-jerk reaction, this is something is alternative choice. If you won’t pay 9x and you want to continue to grow organically, you have to look within your units. And there is one thing we have with our customers. We have lots of customers around the world. There is lots of opportunities. We just was like the pick of the litter, whoever with the best idea, with the best return, with the least amount of CapEx, that’s where we decided to go. But that concept, from our viewpoint I think is kind of run this course, we are finished with that. Now we are looking for other ways to grow the company and maybe we will be back in transactions, maybe it will shakeup in softness in economy and everything else, down comes the multiples of EBITDA that these companies are willing to pay.

Let me hop in and just kind of remind you, this is Matt speaking that roughly half the revenue of the business that being the industrial equipment group and supply technologies does not require CapEx to grow the business. The equipment business is largely built around intellectual property and selling know-how related to the equipment and the aftermarket related to the embedded equipment. Supply technology requires capital to grow, but it’s on the working capital side. So, you might look at the overall company and say boy, it’s $30 billion on $1.5 billion isn’t a lot, but that’s part of the reason – part of the reason we think that $35 million is sort of a kind of number that is the right number for our business and incorporate some of the best process improvement and growth capital ideas is because really only half of the business is capital-intensive. So, I don’t know if that helps you understand a little bit how we think about it, but we do see significant opportunities in the other half of the business, most notably in our forge business, most notably in our fastener manufacturing unit and in our automotive segment. And those are around some of the issues we have already discussed, some of it is global expansion taking our technologies into Mexico and China most notably as well as expanding capacity in fast growing areas. So, I don’t know if that helps.

It does. Great, thank you so much. And then just the impressive margin performance in some of your segments is there anyway you could get a little more granular on where that’s coming from, is it mainly product mix, is it better efficiencies on the operating line, is it a combination of both? Any sort of walk through of that would be great?

Yes. I mean, we touched on it a little bit in my comments, but maybe I could revisit them by saying supply technologies, I think that we had solid volumes last year as the year got softened in the fourth quarter undoubtedly. But throughout the year, we saw great utilization at most of our locations, particularly those related to auto and truck. So, no, I think we also saw some nice product mix towards some proprietary products, which I think come with slightly higher margin. So, we had excellent, excellent mix of products and excellent utilization in that business during 2015. We also talked a little bit about assembly components. Certainly, that really is the auto-focus part of our business, good volumes, slightly improved pricing in some areas that were underwater. So, I should think we addressed that business that we have been discussing almost every quarter. That’s been a work in process for as long as I remember. And I think we just did a better job in 2015 on executing on the volume we have had.

Great. And then one more if I may, within auto, it’s obviously been an area of strength and will likely be one going forward. And you guys have done a great job diversifying your customer base generally speaking as well probably in auto, but is there any program or customer in auto, where you feel you are – you have got a little bit more exposure than the average in the company? And then in that same vein is there any opportunities for customers where you are maybe under-penetrated that you see an opportunity going forward?

Well, Chris, I could answer that and I will, but we look at it a little differently here. You mean, yes, we have customers and one is more important than the other and that can happen. But again, our concentration and our investment in the auto industry and we can go back, this really started in ‘10 and ‘11 is we are looking at the 90 million cars in the world, not the 16 or 17 in North America. And we have been very, very patient about deciding and selling just one item all, everything we sell through any of these auto companies would be aluminum. As you know, we have been very careful to get ourselves in three positions, not only aluminum lightning of the cars we got ourselves in gas injection, which is really a growth industry. We have got ourselves in the hose business, the turbocharge business, which is excellent and the fuel filler systems. So, we have four product lines that we are trying to sell into on a long-term basis into that 90 million cars. And the thing that we probably should give a little more like to is the fact that we are up in two of those products and hopefully soon three in China, in Shanghai and we are making products there with people or people like General Motors for their production cars. So, this is not about event in the car business, where we are just going to sell more aluminum parts, we are going to sell more pieces in the car. So, if the car volume comes down even in North America, we are going to have a bigger piece of the pie, but the exciting part here is about the international concept and we are really embedded deeply, particularly General Motors in the opportunity in China, I mean, all those Chinese car companies, they did well for a while, but they are really falling behind. I mean, they are taking bigger and bigger market share, is General Motors and soon to be Ford. So, these are relationships we have. We can sell more products. What’s great about the turbocharge business and the gas injection and everything else it is not as capital intense as the aluminum business, which requires tremendous investments to setup those lines. This is more technology. I mean, gas injection and how to do that is technology, it’s not just brute force. So, that’s where we want to go, that’s what we are and 5 years ago, people would say you will arrive when you go deeper into the auto business. Well, we are deeper in the auto business at the right time. So maybe we followed it up, maybe we got a little lucky, but we are there with lots of platforms across the board. So, once [indiscernible] at any particular moment might be important, but not 90 million, it doesn’t represent that. So, we are excited about following this, following our customers in this business and it looks like a hell of a runway for the next 2, 3 years, especially if China comes back and India starts slide up that’s the next place we go.

Great, thank you so much and congrats again on the quarter.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from Steve Barger from KeyBanc Capital Markets. Please proceed with your question.

Thanks. Good morning, guys.

Hi, Steve.

First question is on the guidance you had tightened the high end of the range, but kept the low end. Question is how much confidence do you have this early in the year? Do you already have firm line of sight to $4 or do you internally see a lower number that you are confident in and you are depending on some positive swing factors as the year progresses?

Look, guidance is guidance. We put this out with everything we know today, okay. We have continually done this over the years. We feel that although it’s a spongy start, I mean, there is no one that’s manufacturing everything in North America does not holding their breath of what happened in January or February. So, I am not saying that we are going to change that number. That’s our goal. We intend to make that goal. And it might change narrow to others, but 4.05 to 4.23, the one thing that our goal that we will accomplish is the revenues have to be up year-over-year and the earnings per share, have to be up year-over-year. So, that’s just a view that we had a month ago or thereabouts. And we are here today. I mean, we are going to have to work really, really, really hard, but that’s okay. We are a company that we got to do it last year and the year before and we are going to get through it this year. But we are not going to subscribe to huge growth in this atmosphere. I mean, maybe it’s modest, like in someone’s opinion, but that’s the number and we are going to go after it and we think we can make it. And 4.05 to 4.23 is a nice range and that’s where we are.

Got it. So, 1Q is almost in the books as you look at the cadence of earnings through the year, is 1Q definitely the low quarter and then it kind of ramps sequentially through the year, is that how you are looking at it internally?

Well, it has been over the last 3 or 4 years, it’s been the tendency. This is always something that’s late – we finished strongly. And no, I don’t like to look so at the first quarter, but that still doesn’t affect my judgment relative to anything that were beyond in the first quarter and we believe we can make up, okay?

Got it, yes.

And so – it’s not how you start these years, it’s how you finish them.

Yes, right. Yes, I agree. And obviously, engineered products, is the toughest spot for you right now, right. So I guess, the question is when you look at volume and mix in first quarter, just to help us with modeling a little bit, do you expect the margin comes in below the 7.5% in 4Q or can you maintain that level plus or minus and then maybe that grows as the year progresses?

Well, I think you kind of summarized that, that’s kind of the plan. You have spoken for us, of course, it’s going to be little bit down in the beginning and it’s going to be increased as we go along. But look, we have as many upsides or more than we have downsides. The downsides are everyone knows the downside, everyone knows the first quarter is going to be slow. Hopefully, it will get us out there in election year and maybe the taxes will come down. And if the taxes come down, the earnings are going to go up. I mean, there is a lot of magic to this. And the bottom line is you are going have to work with what you are working with. And the balance portfolio of this company is always something working. I mean, one order in the gas oil business which we have zero in for gas, I mean, zero, we have nothing in for the military. We have nothing in for the lot of things. So, it’s very difficult. And the idea of putting up guidance for the year is difficult thing particularly if you want to be correct. And we would like very much to be correct and exceed this thing and will have a great year based on our numbers, but quarter-by-quarter, it could be ugly, but the net result is this is not quarter-by-quarter, this is the EPS guidance range revised, 4.05 to 4.23 for year, that’s what I am on.

Got it. We talked about supply tech, on an organic basis in aggregate production schedule is coming down or I guess just more simply do you expect revenue there will be up or down in 2016?

Steve, this is Matt. As I mentioned in my comments, I do think that there was some weakening in the fourth quarter, which would not be described as seasonal. I think that, that has continued into ‘16. So, we are going to need to effectively – and we anticipate effectively offsetting some of that weakness with new sales. And this year we have been working hard over the last couple of years. So, I think that no, as we sit here today, build rates are softer than they were this time last year.

Yes. So, I was just going to say it’s a good point. Does this tougher environment cause anyone to accelerate the adoption of supply tech services to help take cost out of their own business?

That’s a great question. I certainly anecdotally there is some of that. We are always engaged and more especially at this moment in a number of high-level conversations and opportunities. Anecdotally, there certainly is some of that pressure on organizations to reduce cost, which accelerates these kind of conversations. I don’t know that make it as a general comment, but sort of anecdotally, you are seeing customers who are a bit shell-shocked a little bit at how things soften in the fourth quarter and are looking to combat it.

Steve, again, it’s interesting, as I talked with people about the ‘16. ‘15 was a tough year, lot of unknowns and ‘16 isn’t much better, okay. So, what we have to really concentrate on is just meeting the goals we need to sustain our momentum here, but we have so many fantastic opportunities that everything is, I can’t tell you, I have never been more excited about the things, the good things can happen if the damn sun would come out. I mean, if we could settle these political things and get this thing going again in America, we are going to do very, very well. So, while there is unknowns out there, which there is, our job over here is to run the company and as modest as it maybe increase the revenue and increase the earnings per share in 2016, okay? And then the rest of it will take care of itself. Don’t think for a second that these numbers or this guidance is not reflective of the company. We have not lost sight of the $2 billion number. We haven’t lost sight of a lot bigger number and the business is there, the customers are there. We just have – you can’t win the game, if you don’t stay in it. And right now, we are playing very conservative as we should be, but that doesn’t mean, there is no indication of where we are going in the company. I can tell you that. We are not anyway optimistic over here. We are just being stewards of a tough environment. You are going to what you got to do to stay in the game and get ready for the future. It’s going to be a bright future in this company, why, because we got all the right customers around the world.

Understood. One more and I will get back in line, so you are guiding net income up a little bit for 2016, how do you think about working capital this year? Is it a source or use and how much does it swing if you have any kind of comment on that?

Steve, this is Pat Fogarty. As you know, our working capital ranges from about 23% to 24% of sales. So as our sales grow, we are going to have some additional investment in working capital. And we expect that during 2016. I would say that the increase that we are going to see is less than what we had in 2015, but we do expect to increase our working capital for the year.

Steve, this is Matt. I want to jump in there and say to some extent we hopefully do, because that would be evidence of some success on the new product line or the new customer launches in supply technologies as well as other parts of the business. As you know, that particular part of the business, supply technologies is a little more working capital intensive. So, if our mix shifts a little bit towards success in those new customers, then you might see a little usage and that’s a really good thing.

Got it. Thanks for the time, gentlemen.

Thank you very much.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Well, I would like to thank all the stakeholders and the investors in the company, the key employees. We are excited about the future here. And as kind of just indicated we will be a little bit careful here, but there should be no indication of any lack of ambition or future for the company. We want to thank you for attending the call and look forward to visiting with you in the near future. Thank you.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.