Edward Crawford - Chairman of the Board and Chief Executive Officer Matthew Crawford - President, Chief Operating Officer and Director Patrick Fogarty - Chief Financial Officer and Chief Accounting Officer

Edward Marshall - Sidoti and Company Matthew Paige - Gabelli & Company, LLC Marco Rodriguez - Stonegate Capital Markets

Good morning and welcome to the Park-Ohio Second Quarter 2017 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 everyone 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 2016 10-K, which was filed on March 9, 2017 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 a 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'd now like to 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 second quarter operation review. And I introduce Matthew Crawford, President and COO of Park-Ohio for his remarks.

Thank you and good morning. Overall, we're pleased with our improved operating results which were in line with our internal expectations. Operating highlights include: higher profit flow-through from higher sales in Supply Technologies; higher sales of fuel filler systems and fuel rail products in our Assembly Components segment, both in the U.S. and internationally; increased demand for new equipment and aftermarket products and services in our industrial equipment group; and lastly, successful integration of our December 2016 acquisition of GH, which is meeting its operating targets. These improvements, combined with ongoing vigilance at the expense line led to adjusted earnings in the second quarter of $0.87 per diluted share, an increase of 14% compared to Q2 2016, and an increase of 28% compared to the prior quarter. Revenue also increased during the quarter by 6.5% to $351 million compared to $329 million in the second quarter of last year. This increase was relatively broad-based as we saw improved revenue performance in most of our businesses. Additionally, we took actions during the second quarter to enable future growth, specifically as we discussed in our first quarter call we completed at $700 million in new financings. First, we completed the issuance and the private placement of $350 million worth of 6.625% Senior Notes due in 2027. The proceeds from the issuance of the Senior Notes were used to repay in full the company's previously outstanding 8.125% Senior Notes due 2021 in the aggregate for principal amount of $250 million. We also paid down the company's $21 million term loan, and with the remainder a portion of the balance on the company's revolving credit agreement. Also in April, we amended our bank credit agreement, which among other things provided an increased revolving credit facility of up to $350 million, extended the maturity to April 2022, added an accordion feature for an additional $100 million, while also providing better overall terms. We believe that this debt financing is critically important to the company's future, providing increased capacity and flexibility to enable future growth. Market interest in our new Senior Notes was extremely high, allowing us to achieve a significant reduction in the interest rate on the new notes of almost 150 basis points. At June 30, 2017, our overall liquidity was $250 million, which included $73 million of cash and cash equivalents. Also on the strategic front, during the second quarter 2017, Supply Technologies completed an important acquisition related to our growth strategy in the aerospace and defense segment, by purchasing Aero-Missile Components for $10.5 million in cash. Aero-Missile or AMC is a supply-chain management business providing high-quality specialty fasteners and other components to the defense and aerospace markets. We continue to believe that Supply Technologies will meet its goal of building $100 million business in this industry through its Apollo Aerospace brand. The AMC acquisition, like our acquisition of GH in December 2016 is an excellent example of the type of deals that we're pursuing as part of our M&A strategy. Our strategy continues to focus on companies that operate in favorable end-markets where growth opportunities exists, in this case Aerospace; are complementary to one of our existing businesses, in this case Apollo Aerospace, which is part of Supply Technologies; thirdly, are strong operationally with strong management team supporting the business; and lastly, will add strategic strength to the long-term value of the business brand which acquired it. Now, let's move on to our detailed results for the second quarter. As mentioned earlier, we achieved improved earnings this quarter. Adjusted diluted EPS was $0.87, per diluted share during the second quarter, a 14% increase over the $0.76 adjusted in the second quarter of 2016, based on 12.4 million shares outstanding. The $0.87 represents a 28% increase sequentially over the first quarter of this year. As I have mentioned, sales were up 6.5% year-over-year to $351 million, compared to $329 million a year ago. This increase was due to higher sales in our Supply Technologies and Engineered Products segments, driven by increasing demand for our products and sales from GH, which was acquired at the end of 2016. In addition, fuel related product sales increased significantly both year-over-year and sequentially. Gross margin as a percent of net sales increased by 70 points year-over-year from 16.5% last year to 17.2% this year. On a sequential basis, the improvement in margin percentage compared to last quarter was over 100 basis points. The margin improvement this year was due primarily to profit flow-through from a higher sales levels and improvement in our historically higher margin engineered product segment. SG&A expenses were $36.2 million in the second quarter compared to $34 million in the second quarter of last year. The increase was due primarily to SG&A expenses in the GH business, which was acquired at the end of 2016. As a percentage of sales, SG&A expenses were 10.3% in each period. The second quarter of 2017 interest expense was $7.9 million compared to $7 million in the prior year. The increase was due primarily to debt incurred in connection with the GH acquisition, the higher outstanding Senior Notes balance and higher borrowing rates during the current year quarter on our revolver. In the 2017 quarter, we incurred a loss on extinguishment of debt of $11 million, this amount included $8 million of tender premiums paid to repurchase the old Senior Notes of $3 million related to our unamortized prior debt issuance costs and other fees and expenses related to our form of borrowings. These amounts are non-recurring and I'm going to add it back to arrive at the adjusted EPS. Our effective tax rate for the second quarter was 38%, compared to 32% last year. The increase in the effective rate during the quarter was due to a discrete expense item, which drove the quarterly effective rate higher. We expect the full year 2017 effective income tax rate to still be 30% to 32%. Now, let's look at the segments. In Supply Technologies, sales were up 7% from $133 million last year to $142 million this year. This increase was driven by a higher customer demand in several of our key end-markets and new business implemented in the second half of 2016. We saw improved end-market demand in many end markets including power sports and recreational equipment, semiconductor and aerospace. These increases were partially offset by lower year-over-year sales in the heavy-duty truck and truck related market, which is down 10% year-over-year. However, while the truck and truck related market was down versus 2016, it did grow 26% sequentially compared to the first quarter. We continue to see the second half of 2017 demand strengthen in many of our key end markets including heavy-duty truck. In addition, strong sales continuing in our fastener manufacturing business as sales were up 5% compared to a year ago, driven by increasing global customer demand for our proprietary products. Operating income in Supply Tech was up 12.4% from $10.9 million a year ago, an increase of 14%, due primarily to the profit flow through from higher sales. Operating profit margin in the segment increased to 8.7% from 8.2% a year ago. In our Assembly Components segment, sales were down from $134 million in 2016 to $126 million in the current year. The decrease was due to lower sales in our aluminum business compared to last year. Our aluminum business has transitioned from the loss of volume during 2016, and it's now stable and profitable. We expect continued increases in production from new business, which will benefit the second half of this year. This decline in the aluminum business were substantially offset by higher sales volumes in our fuel filler and fuel rail products businesses, which were up over 30% in the second quarter compared to a year-ago, driven by new product launches in several plans in the U.S., Mexico and China. We expect strong continued sales [ph] benefits for the remainder of 2017. Segment operating income for Assembly Components was $13.1 million, about 10.4% margin compared to $14.2 million or 10.6% margin a year-ago, a lower margin contribution was driven by the lower sales in our aluminum business. Turning now to our Engineered Products segment, sales were up 33% from $62 million, this year - last year to $83 million, this year the higher sales with results of organic growth in our induction heating and pipe threading equipment business compared to 2016 and sales from the acquired GH business. Operating income in the segment was up 81% to $5.8 million, or 7% margin in Q2, compared to $3.2 million last year. And our industrial equipment group, new equipment sales were up 64% over Q2 of last year, and 24% sequentially versus last quarter. Notably aftermarket sales were up 24% over the last year and 17% sequentially. Although, certain end-markets in the segment remains sluggish, primarily rail and military aerospace, we saw an increase in bookings during the first six months of 2017 in our capital equipment business in both new equipment and aftermarket parts and service. Specifically, bookings in the first half of 2017, excluding those related to GH were 58% higher than the first half of 2016 and 32% higher sequentially compared to the last six months of 2016. We are optimistic that we have finally broken through the revenue trough in the segment and expect to continue to see incremental improvement throughout the rest of the year. Moving back now to our consolidated results, Q2 operating cash flows were $9.2 million, this amount included a use of cash of $11 million in the quarter to fund working capital levels and support of our higher sales. However, in terms of days of net working capital, we improved by approximately five days compared to a year-ago. And we expect this improvement to drive higher operating cash flows in the second half of 2017. For the full-year, we expect operating cash flow to be approximately $45 million to $55 million. In the second quarter, we had CapEx of $6 million giving us just over $12 million for the first half of 2017. For the full-year, we expect to be about $35 million. I'd now like to comment on the earnings guidance for 2017, based on our results in the first half and our expectations for continued improvement in several of our key businesses, we are reaffirming our full-year 2017 guidance of adjusted EPS of $3.15 to $3.35. In conclusion, our second quarter results were very positive and provide us with confidence, and our ability to achieve our 2017 goals. With debt financing complete, we have the capital needed to support our various business initiatives including investments in both organic growth and acquisitions. Thank you very much.

Thank you, Matthew. One brief comment, the issuing of the bonds was a strategic part of our planning here at Park-Ohio. We want the company to be in position for substantial growth through both organically and through acquisitions. And placing these 10-year bonds at dramatically reduced rate, I think was a good strategy. We are very happy to having them in place and we it gives the company new balance sheet, it gives the company a lot of flexibility. At this time, I'd like to turn over the line to questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Edward Marshall from Sidoti and Company. Please go ahead.

Good morning, guys. How are you?

Edward, how are you today.

I'm doing okay.

Great.

So I saw you re-affirmed your guidance. I'm curious does that include the 10% top-line guidance that you previously stated?

In prior calls - this is Pat Fogarty, in prior calls, we estimated our full year revenue to be about $1.4 billion, and that's where we continue to expect to be.

Got it. Okay, so as I look at the midpoint of your guidance, first half, the second half, it looks like there is a 10% increase in the second half earnings. And I'm curious what's - is that more driven by the top-line events or are you looking at something additional [across there] [ph]?

Hi, it's Matt Crawford. No, I think that, obviously the business strengthened sequentially as I commented a number of times in a number of businesses. So we expect to see some level of that continued strength flow through to the latter half of the year. I don't know that it's anything unique. I think it's more sort of the new normal if you will relative to the current state of the business.

Got it. I just want to make sure that we're kind of through the cost cutting initiatives, the large majority of the cost cutting initiatives and that's mostly behind.

Yes, I mean, as we've commented in the past, and it continues to be true, there is always parts of the business that we are focused on and are going through some level of restructuring. Having said that, it's a pleasure to be able to call, where the vast majority of the businesses are growing, again.

Right, Aero-Missile Components, again, a small - there are some larger competitors in that marketplace and I'm just curious may be you can kind of talk about maybe what differentiates that product group from the larger peers. Maybe you can give us a split on defense versus commercial revenue programs and then if there is any programs with revenue on the defense side?

Ed, this is Pat again. We have always been active in the military space within Supply Technologies through a business that we acquired several years ago. This business is very complementary to that business in terms of its end-markets and strategic locations. And so, we believe that the combination of our two businesses provides strength to be much more competitive, especially as it relates to custom-type fasteners and proprietary fasteners in Class C components.

Got it.

Let me give a little color to that also. We've been interested, Ed, in those for sometime in expanding our activities in the aerospace business. The various entry have been, in lot of places, the price points and the cost of entering this market, these assets that are have been in my opinion overpriced a little bit in the last three or four years. So we have been very patient. But you will see more of this, but this is a terrific opportunity because it's where we want to be with the right customers, with airplane platforms and engine platforms. So we will continue into this business at a very measured pace, because it seems like the multiples what these companies trade for has come down to the point where we can build the platform modestly over the next two, three years. But we want to be in this space. We've had very little of it. But we got to have to be patient. And we have been patient, but this is a terrific start to add to what we already had in the queue.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Matthew Paige from ‎Gabelli & Company. Please go ahead.

Good morning. Just to build on the last answer there, could you maybe give us a little more insight into your M&A pipeline and what sort of valuation trends you're seeing in the marketplace?

Quite frankly, it's been in the last - in the last six months, it's the crazy multiples of private equity, haven't disappeared but they pulled back. I mean, we don't see things out there at eight and nine all the time anymore. We see the industrial properties, which we're very excited about, we see the industrial assets coming back into the real serious opportunities of - we like to buy things at 5.5 and get them to 4.5. We always try to buy something that is –we can bring something to the table other than just dollars, some experience and so forth, and restructuring. But clearly, the private equity is not as - we don't see it as intention to what's before. I think they struggle with the idea, what is a platform, what is not, what do they need. Well, they needs that are lot bigger than where we're going to play. So they moved upstream in the competition, not only the multiples, but they can't invest the type of capital they have unless they're buying something, $300 million, $400 million. And we are willing and operate very effectively in revenues of $50 million and $100 million, we can go bigger with new balance sheet, but there is a same discipline. But there has been a change to settle, but it's going in the right direction for company like Park-Ohio.

Got it. And just a follow-up on that, are you comfortable with making an acquisition, as you would continue to integrate GH in the Aerospace?

Well, we look at quite a pipeline, the acquisitions on an everyday basis, I mean, Pat Fogarty particularly involved in that. We are looking at transactions every single day. There is a plenty of opportunities for our company, we just have to be very careful and what we will pay and what we will bring to the table. But there is no shortage our transactions quite frankly, there is a little fatigue by people, their selling companies, their families particularly that about the issues it come with private equity and private equity customers are very concerned. And if you are going to buy a company today, their customers are interested in and not getting in a position where I've had a customer, where I've had a supplier like Park-Ohio for 10 years, and we sell it and the new supplier ups the prices and changes dramatically the relationship. They are very cautious about that. So we get a lot of positive win from our back on the basis that - this is a company that has historical - history of keeping assets and development over period of time. So a lot of good things settled, no one big issue, but at the balance sheet it sure helps, when you've been able to get the capital we have to put it in place over 10 year period. We've got a long runway here. We can be very patient, but there is plenty of opportunities, but we will probably state a big, big, big acquisitions is not in our D&A at this point.

Got it. Thanks. That's really helpful. And then the last question for me is, could you remind us your exposure to raw materials as well as the pricing mechanisms that you have in place.

This is Matt. Obviously, we are in a diverse set of businesses. So it will be hard to address everyone comment. But I will take a few of the larger businesses. For example, supply technology has a variety of raw materials embedded in the purchase products, as you know, they do lots of machine components, metal components fasteners, also non-rubber, plastic, and label products. So it'd be hard to comment categorically, but I will say that some of the larger contracts with customers and long-term agreements include indexing based on whatever raw material or input might be troubling in the items they acquired. So that is addressed in some of the larger contracts, I'll speak for a moment to the aluminum business, where the aluminum is an index also with the customer amount. So I think in general, most of our significant relationships in the business include the opportunity to address pricing if there is significant inflation in important raw materials. Having said that, I will tell you that some inflation generally good for our business. Obviously, our Engineered Components group, which has struggled mildly recently some to that is it direct exposure to some of the basic industries including oil and gas, and steel.

Great. I appreciate the time. And thanks for taking my call.

Yes. Thank you very much.

Thank you. Our next question comes from the line of Marco Rodriguez from Stonegate Capital. Please go ahead.

Good morning, guys. Thank you for taking my questions. I was wondering, if maybe you can talk a little bit more about the AMC acquisition, obviously, it doesn't seem to be a very large transaction, so it's not altering the guidance. But if maybe you could give a little bit more color as far as if they have any sort of revenue concentration, what their kind of seasonality might look like, and is there more commercial or military?

Well, both. We look at this, as we given this trip into the Aerospace business, when each of these customers has a list of customers. And there are kind of all the same customers, there is not a lot of people that's making airplanes and they're [indiscernible] in the parts business. So what's you are basically doing is to an acquisition like this one, it's a carrying relationship with these companies, okay, didn't play. All these - the aerospace is quite unique from the standpoint that there are lot of rules and regulations to supply base. We have to be certified. We have to be in the certain building. It's very complicated. It's not as easy as going into industrial space. If you are supplying with the airplane engine manufacturing, for example, and you have a facility. You can just move across the street to a new facility and decide that, you can't do a lot of things, because it's a certified site. So there is lots of loose ends. But this is all about building a relationship - starting to building a relationship with these major companies. I mean, when it's all over there is only 20 or 30, I'm doing this. And they are begging [ph] that, obviously Boeing and others. But the military part, we are pretty solid there, because of our long relationship with Kropp Forge in Chicago with the military with landing gears and so forth. So that's we have that part and we'll move with that. This is really the beginning of our effort into the Boeing's of the world and others.

Got you. And what is - are the revenue run rate look like, I'm assuming that there margin structures is relatively similar to supply technologies?

Yes, it's very small, Marco, from purpose that we typically don't disclose the type of information, but it's very immaterial to the total business.

Got you. And if you could comment a little bit more, I know, you made a few comments on the GH integration. Am I think, I believe you guys - it was on target. How was that sort of progressing from the expense aspects and how are you thinking about that as far as meeting your targets for this fiscal year. And then also lastly, I apologize, what was the revenue contribution for that, they kind of looking for the organic growth rate for Engineered products?

Very common, I'll let Pat address the specifics. I want to first make clear that we tried very hard to speak at a segment level. We do obviously speak to occasionally businesses in side of segment. We'll probably largely try to refrain from talking about a business inside a business that's inside a business that's in a segment. Because, I think, it really would potentially being misleading relative to our business is consolidated and how it really looks going forward. Revenue numbers get splendid, cost numbers get splendid. So I don't think, we can answer the first part of your question very accurately other than to say the business is performing in the first half of the months, as it relates to our acquisition model - on target. So I think that what you're seeing, what you saw on our forecast. And what you're seeing on updated forecast is consistent with our objectives around that business, obviously it's a pretty small part of the overall picture.

Yes, Marco. This is Pat. To answer your question and how much of the incremental related, I would say 50% of that pickup we saw in revenues was organic and the other related to - the rest related to GH.

Got you. Very helpful. And then just last question here, if maybe you can kind of talk a little bit about gross margins. You've seen some very nice improvements here sequentially and a decent one year-over-year. Obviously, volumes are picking up and that's very helpful. How are you guys thinking about that movement on the gross margin line for the second half of the year?

As we mentioned earlier, we don't see huge increases in our revenues in Q3 and Q4. We should see some pickup in the gross margin, just based on the mix of products. But I would expect margins to be very similar in Q3 and Q4 compared to the second quarter.

Got you. Appreciate your time, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Steve Barger from KeyBanc Capital. Please go ahead.

Hey, good morning, guys, this is Ken on for Steve. I wanted to touch on assembly. You mentioned that the aluminum business had transitioned back to stability and batch profitability. Maybe give some color on the demand trends within that business and how are you thinking about assembly into the back-half, given that you do have some relatively easy comps?

Yes, so obviously we worked through most of last year to adjust our cost structure in that - this is Matt, sorry, - to address the cost structure. I think that we have been successful in doing that. So we're running a business at a much lower revenue rate as we wait for new business to come. And we're able to do so at positive EBITDA and cash flow perspective. So I think we're in a pretty good spot as you mentioned. Now, that that where we expect to see incremental revenue was we continue to see new product launches. We would hope to see positive comps going forward. So I think that we feel pretty good about that forecast. We think that the revenue number has troughed. It's been a rough 12 months.

Got it. And then I wanted to talk about your comment on better aftermarket sales and industrial. Maybe just give a little bit of color as to where has the demand picked up in the aftermarket versus the OE side of the business.

I think we've seen it across the board. I think we're seeing more activity in our key markets. That's not fair much, because, I mean, these were incredibly depressed end-markets. So - but no, we're seeing it across the board. And I think particularly of note, although nowhere near where it was historically, there is some activity in oil and gas.

I think the other - this is Pat. I think the other point just to add on to Matt's comments, is our aftermarket parts and service business is global and we're performing those activities around the world in Asia, in Europe. And so we are seeing strength in various end markets. It's a very diverse product mix and the aftermarket parts and service supports that. So as diversified as it is, we're seeing pickup across the board and around the world.

That's good to hear. Last question for me, it was great to hear the color on the organic orders within Engineered products, as you think about and you look at the order growth rate in the backlogs that are in front of you, how are you thinking about incremental margins within that business for the back-half and where could incrementals go versus the first half?

I'll give Pat a minute to think about that. We are reluctant to be very aggressive in this business right now. As I mentioned in my comments, we feel very good about the backlog in the business. We haven't seen this type of backlog in quite a while. But the business is still disproportionately reliant on margin enhancement in the new equipment side of the business and how we execute against the backlog. So I'm - we will be very careful to be too aggressive at this time. While we - as I mentioned in my comments, expect to see improvement in the backhalf.

Yes, the only other comment I'd say is, it depends on the timing of how that equipment flows through the operation. Once you book a project you're somewhat under the - with your suppliers, you're waiting for them to deliver the equipment to the extent that we can get good flow-through. We should see higher margins, but we're optimistic, but we're also going to wait and see.

Good color. Thanks for the time, guys.

Thank you. Our next question is a follow-up from the line of Edward Marshall from Sidoti and Company. Please go ahead.

Guys, I just want to follow up on. It wasn't asked, but you kind of touched on it a few different times in different ways. Is July a strong - and I guess, I'll tell you what I'm getting at, I'm going to look at the cadence through the quarter. Was April the weakest and May the stronger, and June even stronger than that, that carry on to July? Just trying to get a sense as to what the mason [ph] area looks like.

The only comment I would make, Ed, is that July traditionally is a slower month in our business, just because of various shutdowns that occur. But we see an improved schedule compared to a year ago. There are less shutdowns than we saw last year that roll into the month of August. But I don't want to comment on relative cyclicality within a quarter.

Okay. And then finally, I just wanted to ask about your thoughts broadly speaking on section 232 and what that might mean. I assume you're a consumer of aluminum and what that might mean to maybe margins on a go-forward.

This is Eddy. That's a term I heard before, but I can't bring a relationship to the aluminum, would you bring - help me out of that?

Sure, sections 232 is the tariffs, broadly started with iron ore and now it's moving over to aluminum, discussion within Congress and the Executive branch.

Well, the - from an aluminum viewpoint, our main supplier for the aluminum is a Canadian company and I don't know if they're entangled in that or not or would be a target of that issue. I'll have to do some research on that and get back to you. But they haven't signaled that to me. I've heard the term, but maybe I'm just - we're talking to the Canadians. Maybe, they are involved and they don't feel it impacts them also, I'm sure we'll be talking about it.

Okay, okay. Thanks very much, guys.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Ladies and gentlemen, thank you very much for your continuing support and have a good day.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.