Edward Crawford - Chairman and CEO Matthew Crawford - President and COO Patrick Fogarty - VP, CFO and Director, Corporate Development

Ken Newman - KeyBanc Capital Markets Edward Marshall - Sidoti and Company Matthew Paige - Gabelli & Company Marco Rodriguez - Stonegate Capital Markets

Good morning and welcome to the Park-Ohio Fourth Quarter and Year End 2016 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 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 relevant risks and uncertainties maybe found in the earnings press release as well as in the company's 2015 10-K, which was filed on March 14, 2016 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 to EBITDA as defined, please refer to the company's recent earnings release. I would now like to turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Welcome, ladies and gentlemen to year-end review of the 2016 Park-Ohio activities. I’d like to take this opportunity to turn the conference over to Matthew Crawford, President and COO of the company. Matthew?

Thank you and good morning. Before I review the fourth quarter and full year results in detail, I want to share my thoughts on 2016 results taken as a whole. Looking back at 2016, while sales and earnings came in below our expectations due to weak demand in many of our key end markets we were able to achieve success on a number of fronts, including reducing costs, maximizing cash flows, repaying debt, completing a strategic acquisition and positioning the company for growth in 2017. Many of our key industrial end markets experienced challenging conditions throughout 2016 including heavy-duty truck, steel, oil and gas, military and defense, agriculture and power sports among others. In addition, the accelerated end for the production by Chrysler of two programs significantly affected our aluminum business by over $40 million in sales in 2016. In spite of these conditions, we continued to serve our customers with the high quality products that we're known for and are working with them to innovate products for the future. Also we continue to win business at existing and new customers. Accordingly our lower sales in 2016 were strictly the result of weak end market conditions and generally not a loss of customers or market share in any of our businesses. We're well-positioned to increased sales as these end markets recover through both higher sales of existing products as well as sales from new products. In response of the lower demand levels we took actions to reduce costs. In businesses affected by weak demand, we reduced headcount by over 650 full time employees during 2016. We also reduced discretionary spending and SG&A to improve profitability in the immediate term, and identified and began to implement fixed cost reductions that will contribute to higher margins as sales levels recover. Operating cash flow is a key focus of ours in 2016. In response to weak demand levels the company work to maximize working capital efficiency and as a result, we delivered $73 million of operating cash flow an all-time record for the company. We utilized our strong cash flows from operations for two primary purposes. First, we funded $28 million of CapEx during the year, primarily related to global growth initiatives in our fuel efficiency businesses. And secondly we used operating cash flows to repay $33 million of outstanding indebtedness, primarily on revolving credit facility. In December 2016, we announced the acquisition of GH Electrotermia, headquartered in Valencia, Spain. We are very excited about the GH business, including its product offerings customers and end markets. GH is an excellent fit with our existing induction heating equipment business and has a strong management team. We expect the acquisition to be modestly accretive to earnings as we integrate GH into our system. Finally, we have positioned the company well for future growth in 2017 and beyond. In our supply technology business, we continued to implement new business with several customers, particularly in the aerospace market. In Assembly Components, the investments we are making in Mexico and China for fuel filler systems and fuel rails are progressing well, with expected revenue from these projects projected to impact our business by late 2017. We're also launching new transmission and suspension related business in our aluminum products business, which in some cases are currently launching and are expected to generate an additional $70 million in revenues by 2019. And in our engineered products division, in addition to the GH Acquisition and the synergies we're expecting to capture we are also pursuing identified opportunities with several existing customers as steel, military and defense and oil and gas demand starts to rebound. The recovery of these sales to normalized levels will have a significant impact on our induction belting and hardening pipe threading and forging businesses. Shifting now to fourth quarter results, sales in the fourth quarter of 2016 were $307 million, down 12% compared to 2015, due primarily to the weak end markets, the weak end market demand in key industrial markets across our business that I've already discussed. We were able to hold our gross margin percentage fairly steady despite the drop in sales at 15.2% compared to 15.6% a year ago. We were able to do this by reducing cost and our continued focus on manufacturing efficiencies. SG&A expenses for the quarter were down $1.4 million or 4% compared to last year, due primarily to our cost reduction actions as well lower compensation cost. Interest expense was lower in the fourth quarter of 2016, reflecting the favorable impact of our debt repayments during 2016. Net income per share for the quarter was $0.53 per diluted share, or $0.66 per diluted share on an adjusted basis. The primary add back to arrive at adjusted EPS in Q4 was non-recurring acquisition costs associated with the GH acquisition. These amounts compared to earnings $0.95 per diluted share last year or a $1.15 on an adjusted basis. Taking a look now at our full year results, net sales in 2016 were $1.3 billion compared to $1.5 billion in 2015, a decrease of 13% due to the end market weaknesses that I've already discussed. Gross margins were flat year-over-year at 16% as our cost reduction initiatives offset the negative margin impact from lower sales. SG&A expenses declined $5.3 million in 2016 compared to a year ago, a drop of 4% due primarily to our efforts to control cost and reduce discretionary spending. As a percentage of sales, SG&A increased from 9.2% in 2015 to 10.2% in 2016 due to the impact of the lower revenue base in '16 compared to the prior year. Our effective income tax rate in 2016 was 21% compared to 30% a year ago. 2016's rate benefitted from the reversal of a $4 million of income tax accruals in Q3 relating to our previous tax position for which the statute of limitations expired. Excluding that impact the effective rate in 2016 was 31%. Diluted EPS in 2016 was $2.50 a share or $3.01 on an adjusted basis. These amounts compared to $3.88 or $4.17 on an adjusted basis in 2015. Now a look at the segments, In Supply Technology sales we are down 13% overall, driven by lower customer demand in the heavy duty truck market which was down 33% year-over-year; power sports and recreational market, which was down 20% year-over-year; and the bus and coach market, which was down 33% year-over-year. These declines were partially offset by an increased year-over-year in sales in the aerospace market and we're very excited about this aerospace trend and are forecasting continued growth in 2017. Also we continue to implement new business with several customers and several end markets at supply technologies. Also in this segment our faster manufacturing business continues to perform very well as we continue to expand sales of our highly engineered patented products on a global basis. In the fourth quarter of 2016 we completed our move into a larger more efficient facility to meet growth needs of this product line as well as the capture of additional manufacturing efficiencies that are expected to benefit results starting in early 2017. Operating income in the supply technology segment decreased in 2016 to $40 million or 8% of sales compared to $50 million or 8.7% of sales in the prior year. These decreases reflected the lower sales volume from the key end markets described above. In our Assembly Component segment sales were down 7% in 2016 compared to 2015, driven by the impact of Chrysler's decision to accelerate the end production on two programs which impacted our aluminum business. Partially offsetting the lower revenues in this aluminum business were higher sales in our fuel direct injection, fuel rail systems, fuel filler systems and rubber products businesses, driven all by new product launches. We’re excited about the future of these businesses in terms of both new products and new markets. As I mentioned earlier in 2017 we’re ramping up production in our facility at Mexico and are starting up two plants in China to serve the growing Asian market for our products. These locations will generate significant new revenues in the coming years beginning in the second half of 2017. We expect combined revenue in these markets will exceed a $100 million by 2019. Operating income in the Assembly Component segment was $51 million or 9.5% of sales in 2016 compared to $58 million or 10.2% of sales in the prior year. The decreases relate primarily to the reduction of sales volumes in aluminum products mentioned above. For the full year of 2016 aluminum product sales and operating income were down $64 million and $6 million respectively compared to 2015. During 2016 we took actions in response to a lower demand in aluminum which is reducing headcount, which sought to offset some of the profit loss from lower sales. Also in 2016 we incurred over a $1 million of excess startup costs in our fuel rail and fuel filler plants during the launch of new business. Moving on to Engineered Product segment, we were down 22% in 2016 compared to 2015. As in our other segments sales were down due to weak customer demand in key end markets most notably steel, oil and gas and rail. The lower sales in 2016 were primarily in our induction heating and pipe threading business, which has been negatively impacted all the year by weak end markets. New equipment and aftermarket sales of this part of the business were down 28% and 13% respectively, compared to the prior year. Also in this segment our forging revenues were down 13% due to lower railcar and locomotive build rates. Operating income in the Engineered product segment was $11 million in 2016 or 4.3% of sales compared to $21 million or 6.6% of sales in 2015. The decreases in 2016 were driven by the lower customer demand and lack of absorption of the fixed operating cost at our plant. We took cost reduction actions in this business to help offset some of the decline from lower sales, which should help position the business well as demand rebounds. We’re starting to see some positive signs of growth in our backlog and order patterns for 2017 for new equipment and aftermarket parts and service and have recently booked a notable capital equipment order for an International customer in the oil and gas industry. I would like now to discuss our outlook for 2017. Overall we’re expecting revenues to increase by approximately 10% compared to 2016. This increase is driven by a combination of two factors. First we are forecasting organic growth in 2017, which is expected to come from a combination of new product launches, penetration of new markets and some recovery albeit small in certain end markets. Second a portion of the sales increase will come from the revenues associated with our GH acquisition, which had 2016 sales of approximately $55 million. In terms of earnings guidance we expect 2017 earnings per diluted share to be in the range of $3.15 to $3.35. We are also forecasting capital spending of $30 million to $40 million, which is an increase over 2016 to fund CapEx for our growth initiatives, and we’re forecasting operating cash flows of $55 million to $65 million, another strong year of operating cash flows, which we’ll utilize to repay debt and fund projects to grow our business. Finally we expect an effective income tax rate of approximately 30% to 32% for the full year. In closing I want to lead you with this thought. 2016 was an important year for the company. In spite of difficult market conditions we made significant progress on new product launches and market penetrations, delivered record cash flows, enabling significant debt pay downs, completed a strategic acquisition and positioned our businesses for growth and improved profitability as key end markets begin to recover. We’re excited about the opportunities we see in the future. Thank you. I’ll now turn the call back over to our Chairman and CEO.

Well Matt, a great report. Now may I introduce Pat Fogarty, the Chief Financial Officer of the company who will review the results of the operations on the different silos and the overall view of 2016.

Thanks Ed. I think when you look at each of the silos as Matt mentioned, the end markets had a dramatic impact. And as I look at where margins ended up and the cost reduction activities that occurred, we reduced a number of headcount, as Matt mentioned, of full time equivalents of over 650 people, and that had a dramatic impact. And if you just take the 650 people on the average their and their fully loaded annual wage of $40,000, you come up with a very large reduction in cost of goods. And so as we look at the business going forward, in light of the lot of the cost reductions, we still have some work to do on the fixed cost side of the business. But we expect margins to continue to improve as our revenues rebound.

Thanks, Pat. Before we open up the phones for questions, I want to go back to one thought, in Matthew's presentation. When you take the truck business, we all know what's happened there and you take the oil and gas business and the issues in the rail business and the recreation business, clearly, there is close to $200 million in sales. Now these customers have not cut our business. And when I consider this kind of sales are in the bank. This will come back. The revenues reductions in ’16 are reflective of that. So when you combined any rebound, these categories adversely affected the company in 2016, and our ability to handle the compression. And you add the prospects of the investments we already have made in the alumina business, and with the 10 speed transmission, and the investments we are making now in response to customers, particularly in Asia, and we are talking about, we are there as always because they want us there. We are not going there to practice. We’ve been in China for very long time. But when you are opening up two plans because you are shipping product from America to their locations, it’s pretty impressive. It’s an expensive way to do business. I think surely when these plants are up and running and we are shipping by air freight out of one of our facilities to protect our customer in China, and the reaction to that, these are investments you have to make long term. This is a terrific opportunity and very robust around things like gas injection and these investments and the turbo charged hosing, at all these items we continue to invest. We continue to follow our customers and the combination of rebound in our current markets and the trucking business will come back. It's, I think at all-time low or ten year low anyway. But the combination of this business coming back and the new business we’re investing and the organic growth, I think we’re right back on track to the numbers that we talked about. It wasn't so long ago, we were talking about a $2 billion revenue company. Well, I still at this point know we are on the track to be going in that direction. So we keep on investing, we keep on working, we manage through a terrific crisis with Chrysler a year ago. So we’re prepared to answer your questions. So would you like to open up the lines please, Doug?

Thank you. [Operator Instructions] Our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Hey good morning guys. This is Ken Newman on for Steve.

Good morning.

Good morning.

Good morning. So some industrial distributors that report monthly sales are starting to see increases, and we heard positive commentary from the oil field distributors that sequential trends have improved. I know you pointed out aerospace as a positive end market for supply side, but are there any other verticals that you certainly see an uptick for that business?

I am sorry, for which business?

Supply Tech.

Oh, Supply Tech, okay, Supply Tech. Yes, I think that in general costs have been improving in that business, since late last year, particularly as it relates to the industries that I didn’t identify. I like to identify some of the more challenging industries like Class A, like recreational vehicle et cetera. So yes, I do think we are seeing some stability and some positive comps. Some of the ones I picked out are a little bit harder to gauge given the weakness in particularly in Class A. Recreational vehicle seems to be stabilizing a little bit. One of our key customers there went through a very challenging year not only in terms of demand but in terms of some of their own internal issues. So yeah, I think that overall, I think that the environment is improving.

Okay, so a related question, do you think an uptick in oil field distribution sales is the leading indicator to some more CapEx related oil field product sales?

I think that’s for our business rig counts, global rig counts, U.S. rig counts on the aftermarket side, in particular are very important. I think that the lack of exploration has probably disproportionately hurt our business. So I think rig counts are the best indicator as it relates to rig count exploration as oppose to reactivation is something that we watch, but as I mentioned in my comments, we have seen a recent booking of a significant international order. So I think that anecdotally we are feeling a little more positive.

Any color you can give on that contract, in terms of when you think that could be monetized out of backlog?

I wouldn’t want to comment specifically, because we have been force on some of these larger oil and gas related projects over the last couple of years. So I would rather just use it anecdotally as a story that we are seeing some strengthening in the market. But what I would tell you is these types of scale projects are typically often have terms that will allow for progress payments. But the full cycle of order to shipment could be as much as 12 months.

Got it. Okay. Just few more for me and I’ll get back in line. Our steel analyst is getting more optimistic that non-auto steel recovery is sequentially improving. Are you seeing any signs of life in your products that go towards steel production.

Yeah, as I mentioned in my comments, I think that we are seeing across variable levels, some slightly improving comps in the steel market and on the aftermarket side. But this is really month-to-month right now. We have been through before on this. So our forecast does not include a significant improvement in the marketplace, be great if it did.

Right. And then just lastly, can you talk about your competitive position on how -- now that you have added Electrotermia into the portfolio, do you have what you need in that business from a product and geographic standpoint?

Yeah, it’s a great question and we probably didn’t dig into this enough. So I am glad you asked that. We have been -- so if you think, if you look at the induction marketplace, it can roughly be broken down and roughly I say, into melting applications and hardening applications. We have also been—always been a premier supplier or global [ph] supplier in the melting side. We have not had a global footprint and leading technology on the hardening side. And hardening is important because it is a significant market place and feeds into all kinds of end markets that are involved with making durable goods and wear goods and whether it be aerospace to automotive to others. So it’s a very broad global industry. With the acquisition of Saet and now the acquisition of GH, we are clearly -- have a global presence, significant operations in the U.S., through our TOCCO brand significant operations in Europe, through Saet and GH, significant operations in India and China. So I would say today for the first time we are a market leader on both the melting and the hardening side.

Got it. And then just one more related question to that, I mean do you how much revenue could that business support without capacity addition, given that you -- it is going to add about $55 million in annual revenue? Is it an efficient producer relative to your legacy business units and what do you expect for margin progression?

We have a global footprint for manufacturing in this business. So, we will seek to balance manufacturing orders to places and locations where they can be done in the most fiscally responsible way. What I’m trying to tell you is, if we get a significant order in Western Europe, if we don’t have the capacity in Italy or Spain, then we’ll make it somewhere else. So I think that one of the benefits that we bring to a business like GH, it candidly was probably quite full, adding $50 million to $60 million revenue range. It is the fact that we can scale -- obviously a core marketing benefit and revenue synergies but there is also manufacturing synergies where we can share responsibility and manufacturing footprint on incremental revenue.

Great, that's good color. I’ll get back in line.

Okay. Thanks for the question, I believe that last one was a especially good one. I appreciate it.

Our next question comes from the line of Edward Marshall with Sidoti and Company. Please proceed with your question.

Hi Eddie, hi Matt and Pat.

Good morning, how are you doing today?

I’m well, how are you?

Very well. Thank you for asking.

So I want to about the assembling components. The facility growth that you have in Mexico and Asia, and I’m kind of thinking about your comments that of second half ’17 revenue generation. How does the front end funding cost of those facilities kind of play out to the cadence to the margin for 2017, I mean how you anticipate that ramp throughout the year? I imagine there will be a drag in the first half of the year?

Well, was a dragging, a little bit of drag in the last half of ’16, I commented about a million dollars' worth of start-up costs, unanticipated start-up costs. So, we are not hitting on full cylinders at the moment. Having said that, let me point out that in Mexico for example, we had a business. We have had several businesses in Mexico for a while. So, we are doing this incrementally. We start to make it sound like we’re [indiscernible] but we are not. We are doing it incrementally. We have installed capacity on the fuel source side, since early in 2016. And as with regard to China, we’ve had significant molding operation there for a decade. We now have, had since early ’16 as well fuel filler operations, manufacturing sulfur [ph] as well. So, I sought of made it in our comment that we are just -- this is just sort of happening now. The reality of it is this has being happening incrementally for at least the last year. So I think that as we move into later part of ’17, we would expect these investments to be purely accretive. And I could also comment briefly on our true Greenfield plan in Jiangsu regarding our direct injection product, that is not up and running yet but most of the business that will fill will be relocated and localized from R&D in the facility. So that should mitigate -- there will be startup class, don't get me wrong, but it should mitigate some of those as we transfer on the most efficient basis possible. So we took some pain and my point is -- we took some pain at ’16. We’re going to take less pain in early in early ’17 and certainly by the ladder half we would expect that to be accretive maybe not at optimal margin but certainly accretive.

Another way to answer that question is the situation we have in Port Wayne [ph] with the customer and the air freight going to that facility as we ramp up, we never, I don't think anticipated the demand. So we were comfortable shipping a little bit. But they're paying for this air freight and we're not absorbing it. But we are still inefficient. We're running too many ships. It's a tremendous amount of pressure on this plant and that's why we're going as fast as our little feet will take us to get this facility up in China. When this level is down the production gets up there, we will be more profitable. We're getting banged around on our cost because we're running shifts, we're running weekends, the loading the planes. I mean they're really running week-to-week over there, and that's strange that a huge company like that company, as I say everyone in China wants to buy the American car. I think I said before the Buick over there is like Bentley. So it's great and it's exciting and it's demanding and they're doing what they can but it's still inefficient, when you are kind of rolling up, running one facility really, really hard, you are going to have inefficiencies, you'll probably have a little bit more scrap that you would normally have and building up the other. So this should transfer. This will all come together in the end of the year and where both plants will be back still fully utilized and but that's important. But it is expensive to work with the customer and move this quickly.

Right. When you take operations from say high cost, and I'm assuming it's a high cost facility in Indiana, and you take it to a low cost region, say in China. And maybe you're not taking the entire business but you are taking a portion of the footprint and moving them. I'm wondering what the incremental maybe cost savings to you is as that business grows. And or are you passing that through as maybe on price?

Listen that I want to be clear on this point. The business, our businesses in China are entirely focused on the developing marketplace in China for fuel efficiency products. So our business model there is a Chinese business model. This is not a situation where we are taking product out of a US plant moving into China trying to play the spread on cost and repatriating it. So I think our model in China will support similar margins to what we seen in the US, but it is not -- it was not a cost play to repatriate product at a greater margin.

Got, I didn't meant that either, but…

Yeah, no, I just want to make clear because I think that there was a traditional model many years ago where you would repatriate product at a lower cost. All of our investments today are focused on growing with our Chinese based customers.

Edward, another and that get you to the thought you probably get around the question. It's like the rubber business. We have operated rubber business in Mexico, we also operate the same kind of rubber business in America. So when you have all this activity around the border and the tariffs and everything else, we never give up our capabilities in America just to go someplace, okay. We are not interested. So we're positioned there whatever way that spins, it's doesn't make -- and if they want to buy these things at a tariff one way we'll make them in one place in America and we'll make them in Mexico. The cost is getting closer and closer between the cost of doing at these places, that labors is going down in China, and in Mexico is going up in value. So the gap -- the freight all of those and all these issues become -- get into play. So we're going to maintain the capacity in these businesses in North America and be stronger and grow there as they do and the same with the rubber business. We're not abandoning one, we're going to be -- we play both sides.

Got it. And I'm curious about the investment is your projects in '17, is that everything that you need to invest in these two businesses to capture that $100 million of revenue that you're looking for in these two regions?

Yes. I mean some of the investments I mentioned, was made in 2016. So…

Sure of course.

2017 will largely finish off our costs related to that.

Got it. So fixed cost reductions, you mentioned in the prepared remarks and there were a lot of costs taking out around the Chrysler operation. But I understand you did throughout the year as well with several other -- just fine turning if you will. Can you talk about maybe the full impact of the cost reductions from 2016 and what you might expect from a benefit in 2017?

I'll let Pat address the quantitative side of that, but to be clear we began this process particularly in general aluminum, but really across the business in the first quarter of 2016. So we are -- our mantra here has been to try and use a scalpel to create a more cost effective environment. But recognize what we said in the comments, which is we're not losing customers. So we need to recognize that with a key customer, and let's use a Class A truck customer for example, we need to support them at the same levels where they are making 10 trucks or 15 trucks, or 50 trucks. So we have been reasonably aggressive on the fixed cost side. But are recognizing that we still have the full book of business in terms of relationships and contracts that we had a year ago. Pat you want to comment on the…

Hi, so Ed, this is Pat. I think what you're going to see as volumes start to ramp up is, we're going to have to bring back certain groups of workers that are more variable in nature, our SG&A that is considered variables is going to increase. But where we've really knocked out fixed cost, not only on the SG&A line, but also at the various plant level, probably has an impact of $8 million to $10 million. So to extent we don't put those cost back into the mix as volumes increase, we should see that benefit drop to the bottom line.

Got it. And I guess, finally, I mean that all leads me back to kind of the my initial, my main question here is, I look at guidance in revenue and EPS and I think about, the 10% top line advance and I look at the guidance for the bottom line of 5% to 10%, I'm just kind of assume, just kind of curious as to where the leverage component kind of dissipates throughout the model because I think -- and maybe you're including acquisitions in that. I It just seems a little bit on the high end, on the top end revenue side. It sounds a little bit optimistic based on what you're looking from an EPS perspective. So maybe you can clear that up for me?

Yeah. I think where you're seeing the drop and maybe the decrease to the bottom line that you may have been expecting is primarily in the tax rate. We've got an defective tax rate for 2017 at roughly 30% to 32% compared to where we were in 2016.

And so that's -- I mean that's the lost leverage from the 10% topline growth is to EPS, is that what you're saying?

I think that's the big part of the decrease and then it's been the mix of where the revenues will come from, where it's supply tech or operating margins are little less in that segment than in some of our other more profitable segments.

Said a little bit differently, I think we expect that we will, if we are able to achieve our revenue goals that we will be -- there will be operating leverage at the bottom line just not on an after tax basis.

Got it.

Ed I also used the word acquisitions. We have not been really that active for last couple of years as you know because of price points, but quite frankly we're seeing some softening in particular in some segments that we really are interested in relative to private equity and so forth. So we think there is a beginning of a feeling that the some good opportunities will present themselves that will be within our range of -- our willingness to pay for it. So hopefully we'll become slightly more acquisitive.

Got it. So in that 10% -- embedded in that 10% is there an acquisition that have been yet to be announced in that target range?

No, no, our forecast are always -- do not include acquisitions.

Got it. Okay great, thanks.

And yet we would expect to close an accretive acquisition during the year.

Got it. Thanks guys I appreciate it.

Thank you.

Our next question comes from the line of Matthew Paige with Gabelli & Company. Please proceed with your question.

Good morning.

Hey Matthew. How are you today?

Good, good how are you?

Fine, thank you.

Could you maybe speak to how the administration’s recent proposals on stuff like border adjustment tax as well as reduction in corporate tax rate would impact Park-Ohio?

Well, this is Matt, Matthew. So I would say very hard question to answer considering that some of those positions start to vacillate every day and if you take sort of a tax position for example undoubtedly a reduction in corporate tax rate would stand to benefit us significantly. We need to understand what some of the offsets are. There’s been discussion about eliminating some of the interest deductability. So it’s a little bit unclear but unquestionably a pure cut in tax rate which seems to be reasonably agreed to across the board at Washington it would benefit us significantly. Our tax rate, as Pat mentioned is in the 30% to 32%. That’s well above I think any number that's being discussed in Washington right now. So that would be generally positive we believe without sort of how [indiscernible] may in terms of offsets. The border tax I think is a little bit of hard one to get our head around as well. But I think it’s important to note that in all of our manufacturing facilities we just spend some amount of time talking about China. We spend some time which we focused on as being largely investments focused in the Chinese market. So that would not be significant. When I think about our investments in Mexico I think largely about the fact that in each of those businesses we have a couple of things going on. One is our customers and ship to points, by and large tend to be in Mexico or South America. So while the products in some cases may end up back in the U.S. our customers are in Mexico or South America. So it well it might be an issue of the supply chain it generally isn’t an issue to us. That doesn’t mean it couldn’t be come and hit [ph] us. And what I would also tell you is in each of those businesses we have U.S. capacity as well as south of the border capacity. So if for some reason there was a huge scramble to re-domicile the supply chain particularly in the automotive business north of the border we would be well positioned to absorb that business back into the U.S. So generally I think that would be a positive for us. I think the one exception we’d have to think through would be in our supply technologies business which is does purchase a fair amount of product out of Asia. That one would be a little trickier on how we would manage through it. Certainly we would also be the best person to help the supply chain in that case re-domicile to the U.S. as well. But that one certainly would be a little trickier and getting our arms around.

Great, that’s really helpful color. And then speaking about…

I mean I guess that I would say I view it as a positive but cautiously.

All right.

Matthew the only add-on I would have. This is Pat is that generally we’re a net exporter of products out of the U.S. in all of our different businesses.

Okay and then taking a look at your both recent acquisition, can you maybe speak to the process of integration. You gave a CapEx target but do you expect to spend any that on integrating the business and what’s the profitability of this like, is it similar to the rest of your induction targets?

Sure, Matt, this is Pat again. GH and where they are located, their main operation being in Spain with a very strong operation in India as well as in Germany, are between say at the end our AJAX cargo [ph] business, we have locations spread throughout Europe as well as in India as well as in Germany. And so there’s clearly an opportunity to maximize the synergies in those three countries. I think in the short term where we’re going to see some benefit is in consolidating the research and development activities amongst the businesses and try to eliminate some of the duplicative costs that we’re going to see. The opportunities that we see in India with the add-on of GH are tremendous. And so we’ll begin to cross-sell products and maximize the sales synergies over the course of the first year or two. So there is a number of things that that are going on right now to bring all the businesses together as one.

Got it. And then the last question for me is you mentioned that you expect to close another acquisition this year but does this acquisition impact your capital allocation priorities at all, what kind of leverage are you comfortable going to?

Matt, we are typically, we think about leverage expectations. We work pretty well in a band of call it three to four times. So we will be thoughtful about retaining our position in that band. Our traditional acquisition target has been, not unlike GH. So we believe we can, sort of acquire and metabolize those pretty quickly without creating much risk to the balance sheet.

Great, well I appreciate taking my questions and good luck.

Well, thank you.

Our next question comes from the line of Marco Rodriguez from Stonegate Capital Markets. Please proceed with your question.

Good morning guys. Thank you for taking my questions.

Thank you.

Most of my questions have actually been asked and answered but just to have a couple quick follow-ups on prior questions. First of on guidance for revenue getting to 10% growth for fiscal 2017. Can you kind of help us think through I mean how much of that is organic growth?

I’ll give the qualitative again, and let Pat think about how he wants to answer that quantitatively. In my comments as you know 10% would be about a $130 million. We identify 55 as acquired growth. So that's significant chunk of that. Of the remaining $70 million to $80 million I think that you can characterize all of that in one way or other as organic growth, whether it be a new business as I discussed in my comments or some very nominal rebound in some of the end markets.

Got you. And then in terms of the acquisition of GH -- post acquisition rather, what is the debt and cash levels currently?

I am sorry, the company of GH, you mean…

Yes, yes combined, I am sorry I am just trying to take a look at your balance sheet just post acquisition?

Yeah, the acquisition was closed before the end of the year. So the year end numbers are current.

I apologize I thought it was closed in January. Got you. Okay, and then in terms of GH, what is the -- what has been their typical growth rate that you've seen over the last few years?

I mean I would say over the last five years they experienced growth in the number of their markets, primarily in India and in Germany. So I would say globally as we are able to help them expand in China and certain other end markets, I would see there be continued growth rates up or close to about 10% a year.

The another interesting aspect of this GH acquisition. During that process we were able to take a major step towards our ability to grow internationally particularly in Eurozone by opening up a direct relationship with BBVA for all practical purposes sponsor and provide the capital. This was done independently within independent bank, in the Eurozone of size and this has given us a foot hold we have been looking for years and that’s ability to identify acquisitions there and opportunities through the banking relationship. We have a wonderful relationship by our group our bank group, by JP Morgan and Key and others but it's company we have been able to establish this finally. So we can do business in Eurozone with the bank and the relationship is building and they will be able to help us in the future and they’re actually pretty broad, they operate in China, they operate all over. They are very-very big in that area. And this is great for us because we don’t have to drag our American group over there. And obviously, it allows us to take advantage in those peak [ph] locations of the tax rate and so forth and so on. But it is not to understate the value of being able to get GH in the queue in Spain with a Spanish bank. This is a tremendous accomplishment for Park-Ohio. It's taken us long-time to develop their credibility international basis to get that accomplished.

Got you. It’s helpful, thank you. And last question, Eddie, you talked about acquisition multiplies starting to become slightly more attractive here to you. Can you may be talk a little bit about the potential opportunity just from a high level, what you might be looking at in terms of the numbers of how many that might be available out there fully. Then also in regard to that if you can maybe talk a little bit about any sort of update you might have on your end five [ph] plan of hitting that $2 billion in revenue.

Okay. Let’s begin with a part of that. As we’ve indicated in the past, from the acquisition viewpoint, we are not likely to buy an amusement park or something. We have a record of saying within our scope of activity, our expertise in manufacturing. We had a tendency to keep the acquisitions in that $50 million range. But what has happened, I think it peaked about three months ago, when certain bank transactions, I looked that, they were lending 5.5 times EBITDA as loans. Well, I have kind of -- that was the top of the private equity insanity in my opinion. Things are coming off that, for lots of reasons. But, we think we are going to continue to diversify the company. We like the profile. I think -- when I look at the results are in ’16, we came through a very dark tough period. And like they always no [indiscernible]. Yes, we didn't do as well as we thought we would. But we are still a better company. We are better company today than we were in the beginning of ’16. So we are proud of that. But the acquisitions are something we are interested in. I happen to think that the aerospace area is an area that we are spending a little more time, paying little more attention to, primarily because we don’t have a lot of it in the house. So you look around the total corporation, it kind sticks out like a sore thumb, why aren't we deeper into that business, which is rock solid for the next five years. So we would tend to see -- intend to look at both side of acquisitions in a new space, with new types of customers, aerospace, military, some area where we are not concentrated right now, is another like in the tool [ph] and more important I think for the first time, we’ll be able to get into markets like that. We might have to start with smaller acquisitions, but that’s fine. We’ve done small acquisitions before. And believe or not, we had a very successful acquisition in England, in the aerospace business that’s doing very, very well. So we think there is an opportunity and as always the numbers come down to within the range of our willingness to pay. But we are still not going to pay nine times. So we’re going to stay disciplined, we are not going to do thing big. And we are going to play close to the vest. So we’ve got a good plan and but I think you’ll hopefully see some activity in that direction.

Actually that’s helpful. Appreciate your time guys, thanks.

Well, thank you.

Our next question comes from the line of John Bomb, from -- a private investor. Please proceed with your question.

Hi guys. How are you doing today?

John, how are you today?

Excellent. I know you had a tough year, ’17 is going to look better. I think most of the questions have been addressed and everybody's jumping the guy right now, I believe on the tax plan. But as you look forward and o some modeling, if we do see some reduction in federal income tax in the U.S., may be even down to the 20% to 25%, as you parse that with the international tax rate what do you think your overall effective rate would be if do that -- if we get that kind of reduction?

I don't we could really address that. I think when we could say, John is that this is I think the case where the 12.4 million shares is real leverage. If they reduce the tax rate down to any level, and increase to EBIT, the value of that new EBIT among 12.4 million shares is tremendous leverage, you would agree with that.

I am a big shareholder, I understand.

We don’t have 30 million shares here. We have 12.4 million, people still miss that. That's the leverage. $5 million more EBIT in this company means something. And I hope there is opportunities in the future for $5 million EBIT chunks, okay. But it would be impossible to put a real handle around it, I'm as you know, involved in it. I don't think anybody has the answer yet, but anything will be great for us. It will be disproportionate because there are fewer shares.

Okay, look forward to seeing that, and looking forward to a great 2017. Thanks guys.

Thank you very much for calling.

Our next question comes from the line of Edward Marshall from Sidoti and Company. Please proceed with your question.

Hey guys. So I wanted to ask -- I think this might be the environment that might benefit supply technologies as outsourcing becomes more realistic, or more likely to control cost at your customers and other OEMs. And I’m wondering what maybe, is there any way you can kind of talk about maybe new awards within supply technologies over the last year or kind of what you anticipate from the 2017 perspective? Just the highlight there.

Ed, hi, it's Matt. Yeah, I mean we are -- rather than try and give you a number what I would tell you is we’ve got significant amount of new business in our plan for 2017. We are particularly excited about our strategic initiatives. And what I mean by that is sure, we are trying to sell more to our current customers, sure we’re trying to land some new accounts in our traditional market place, but we’ve also started a couple of initiatives that are pretty exciting. Now for about 18 months or so we’ve been as has come up several times on the call, focused very aggressively in the aerospace segment. So we are increasingly becoming successful in the commercial aerospace supply chain which is a little bit of a different business but not dissimilar parts. The second sales initiatives or strategic initiative on the sales side we’re excited about is revisiting some of our roots on what we call the mid-market. As you know, we’ve got a number a very large global OEMs, what we have been revising is locating sales people out of our regional distribution centers and attacking local smaller accounts. These typically can be not insignificant and often in terms of revenue standpoint but also be at above average margin. So yeah we’re attacking on the supply tech side on multiple fronts both in the traditional style and in terms of the new sales initiatives as well.

Now just a point of clarification, you said, aerospace and supply tech. I have covered some of those companies as we’ve talked about in the past, there's chunky, chunky margin there, the -- my sense is you are going to start out small, dip your toes and then grow from there, right. So we shouldn’t expect overnight but certainly grow into much higher EBIT margin for that business overall.

Yes, I mean there is -- as you know there is a couple of dominant players in the marketplace there. But there is a lot of opportunity around the edges. So you are right. We are not looking to compete head-to-head with someone like Lessco [ph] who can be everything to everybody. But it doesn’t mean that there isn't a tremendous opportunity at the margin to build over the next several years something there is meaningful to the business, call it $50 million to $75 million in revenue.

If I listen to the whole call correctly, it sounds like you will invest kind of through acquisition first and then grow organically from that acquisition over time. Is that the right blueprint or map that you kind of expect to take?

We’ve already done some smaller acquisitions in 2015 time -- late 2014 we brought a company out in the UK called the Apollo, which was sort of our initial toe in the water if you would on the commercial aerospace side. So I agree with how you frame that strategy. I would just tell you that we’re about a year to 14 to 15 months into it.

Good. And then finally, is this large commercial OEM or are you focusing on smaller regional type aircraft and personal kind of business jet?

Well the answer is all of the above. The acquisition was embedded more in the large jet supply chain commercial jet supply chain, but as you know we have got a position also in other parts of the military aircraft as well as some business jet as well. So I would say that we’re attacking on all fronts.

Go ahead.

Ed, let's break that down to, anywhere in the aerospace, in the military space there are pockets of what the major -- there's not that many people doing all these things. So okay, so but there is a tremendous level what they call -- they call value added suppliers to them, where they take parts and they -- let's say they do machining, but they also do assembly. Okay and ship it to the top companies, okay. I am really interesting in that value added area, okay. You want to do something, you want to be a supplier to them and create value and be embedded with them. Okay and you have to -- each one of these locations as you know they have to be aerospace approved and so forth. So we are going to start to move in the direction where we’re going to very important to people like Parker Hannifin and people like all of these companies that supply them, are embedded in them, do their engineering. So we don’t have to do that but we take parts and finish them or distribute it to them. We will get into ultimately supply technology. We’ll have a huge in this area, we got to build the relationships through value here, value added relationship, so that we are important to them.

Got it. And last question I mean Boeing has done a very good job of controlling its own distribution network and supply of components to this supply chain through, its acquisition of Aviall and I am just kind of curious about is your target the domestic OEMs or are you looking more towards some of the international OEMs, even that arguably are coming back to the United States as well, such as Airbus?

Well, let me tell you my experience with Boeing. We started with [indiscernible] building. So this is 10 to 12 years old. I was able to penetrate Boeing out in California, and got in the facility and laid out spy technologies, and their way of getting to the markets are kick the parts [ph] there is -- in warehouses they have 25 warehouses and parts are piled to the roof, no control over them and I made it pretty far up, I believe the chain until I started talking about the efficiencies and the fact that we would do the quality and we would move the product and we would take it to the point of use. I got as far as being in the hangers, and now all of a sudden I watched these rooms where they had all the fasteners and bolts and everyone doing all this work, all within now [ph] there. Their labor union are going to protect that. You are wasting your time trying to penetrate that. I got pretty high up in there and -- but the unions will not allow you take jobs out of there. So we won't be at the level but we want to be a person that would machine or do some part for them to someone like a Parker Hannifin and let them sell it to the big company, not us.

Got it. Appreciate the comment guys.

And I want to add something to that because it is important. I think the distinction of the [indiscernible] is important. We are not necessarily selling to the OEM. We’re in the supply chain, number one. Number two, when we look at, at markets of interest for us and the customers have interest for us and that supply chain, they are not necessarily focused on a Boeing or an Airbus. For example, we have been developing a significant customer base at a very exciting rate in India, as you may be aware, a significant amount of OEM work now particular, in fuselages and so forth is being done in India. So we’re trying to get a little ahead of the curve as well.

Got it, appreciate the comments guys. Thank you very much.

Well, thank you very much.

There are no further questions in queue. I’d like to hand the call back over to management for closing comments.

Well I want to thank everyone for the -- all the stakeholders, the employees and the investors and the banks and everyone. This has been a tough year for all of us here at the operating level but I think we’ve managed our way through it, as they say at the edge of problems but we’re in a good position. Our enthusiasm is high and we think we have a great plan for ’17 and beyond and [indiscernible] We have a path to the $2 billion the first time everyone started hearing this I think, it was call the N5, I was going to get there -- we’re going to get there in five years. So I've just completed what I call the N4, we’ll be talking more about that. We have a route to the $2 billion and get off track and sell it and making into N5. So now we’re at the N4. So we have a direction, we think we have the profile. We know where we want to go. So we are going to increase the revenue of this company and we’re going to maintain the margins. I want to thank you for your time, your effort and we look forward to speaking to you in the future. Have a nice day.

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