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

Steve Barger - KeyBanc Capital Markets Matthew Paige - Gabelli & Company Marco Rodriguez - Stonegate Capital Markets Edward Marshall - Sidoti & Company

Good morning and welcome to the Park-Ohio First Quarter 2018 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 everyone that certain statements made on today's call may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. A list of relevant risks and uncertainties may be found in the earnings press release, as well as in the company's 2017 10-K, which was filed on March 8, 2018 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 a reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA as defined, please 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 first quarter 2018 review. At this moment, I will turn the call over to Matthew Crawford, President of the company.

Thank you very much and good morning. Overall, Q1 2018 was a good quarter for Park-Ohio. We continued to see strong performance and end market demand as we head into late spring and early summer. Our significant achievements include the following. Record revenues of $406 million, an increase of 18% year-over-year, split roughly equally between organic and acquired growth. Even better, organic growth was achieved across all 3 business segments. Adjusted earnings grew 37% and EBITDA by 11% year-over-year. We delivered operating cash flows of $8 million, liquidity ended the quarter with cash on hand of $89 million, plus an approximately $175 million of unused borrowing capacity under our global banking arrangements. We completed the acquisition of Canton Drop Forge in February. Canton, which is a strategic complement to our Kropp Forge business, has had average annual revenues of approximately $65 million over the past 6 years and serves the global aerospace, oil and gas and other key end markets. Gross margin as a percent of sales was 16% in the first quarter of both 2018 and of 2017. Our gross margin, so far this year has been impacted by some product mix, but more significantly by continued investments in growth initiatives, including new plant startup costs in Mexico and China for Assembly Components. Additional investments, which are also reflected in increased CapEx and personnel expense, are ongoing in Supply Tech and Engineered Products as well and relate to new business initiatives, which will underpin our growth in profitability during the next several years as we seek to maintain our long-term growth rate of approximately 10%. Excluding corporate costs and the $3.3 million litigation settlement gain in Q1 of 2017, our segment operating income increased 70 basis points to 7.6% in the first quarter of 2018, from 6.9% a year ago. The increase was due to the increase in sales volumes and improved operating cost absorption in many of our facilities and demonstrate some operating leverage even during this period of reinvestment. SG&A expenses were $43 million this year compared to $38 million last year, driven primarily by SG&A related to the acquired businesses and personnel-related costs. SG&A expenses as a percent of net sales improved to 10.6% this year compared to 11% last year. Interest expense was higher this year compared to Q1, 2017, resulting from higher average borrowings as a result of the acquisitions we've made. Conversely, our average borrowing rate decreased by 30 basis points, driven by a debt refinancing in April of 2017. Income tax expense this year was impacted by a one-time charge of $1.2 million to adjust amounts recorded in Q4 of 2017, related to U.S. tax reform. Excluding this one-time adjustment, the effective tax rate in the first quarter of this year would have been 29% compared to 32% last year. For the full year 2018, we expect our effective income tax rate to be approximately 30%. First quarter 2018 net income was $9.8 million and earnings per share was $0.78. On an adjusted basis, EPS was $0.93 in Q1 of 2018, up 37%, as I've noted from last year. The primary adjustment for Q1 2018 was adding back the $0.10 for the one-time charge related to tax reform. Finally, EBITDA was $35.4 million, up 11% compared to $31.9 million a year ago. Traditionally, Q1 is lowest operating cash flow quarter of the year, and yet this year, we delivered operating cash flows of $8.4 million, a significant increase compared to roughly breakeven last year. The improvement in Q1 reflects our higher profit performance, as well as improved working capital efficiency compared to last year. Now, let's look at the segments. In Supply Technology, sales were up $28 million or 21%, reflecting organic growth of 11% and 10% from acquisitions made during 2017. The organic growth was driven by higher customer demand in several of the segment's key end markets, including heavy-duty truck market, which was up 36% year-over-year; the aerospace market, which was up 88% year-over-year; the semiconductor market, which was up 12% year-over-year and the power sports and recreational vehicle market, up 6% year-over-year. The majority of our end markets experienced increasing demand throughout the quarter. Our first quarter average daily sales and this is an important number was up 28% compared to a year ago. Significant sales growth in aerospace continued in the first quarter and we are on pace to achieve our stated $100 million in sales in our Supply Technologies aerospace group over the next couple of years. Also in this segment, our fastener manufacturing business continues to perform well with year-over-year sales growth of over 4%, as demand for our proprietary products which support light-weighting in the transportation sector, continue to gain global market acceptance. Operating income in the segment increased during Q1 to $12.5 million from $10.6 million, an increase of 18%, driven by the sales volume increase, as described above. Operating margin as a percent of sales declined slightly from 8% to 7.8%. This slippage is related some to mix, but also to the investments alluded to earlier, which are specifically related to initiatives in mid-market, MRO and aerospace. In our Assembly Components segment, sales were up 4% compared to Q1 2017, driven by higher sales volumes in our fuel products and aluminum product lines. The higher sales of fuel products were driven by new product launches in many of our facilities, including our new fuel filler plant in China. And the higher volumes in aluminum were due to expected increased volumes on products launched in 2017. As we have discussed on previous calls, we continue to make significant investments in 3 plants located in China and Mexico to support planned growth in this segment. Our strategy encompasses 2 key concepts that we're well positioned to capitalize on. First, our product lines will benefit from more stringent global emissions regulations, including LEV III, Euro 6, and China 6 regulations, which include light-weighting, cooling applications, direct injection and others. Second, while some of our products focus on the internal combustion engine, we remain very excited about the global adoption towards electric vehicles, which for the foreseeable future is heavily weighted to the hybrid designs. We are starting to see initial sales from certain lines of these plants and our current projections continue to show a steady sales ramp-up beginning in 2019, which should approximate $150 million run rate in 2020. Needless to say, we are enthusiastic about where our products and facilities are positioned, but mostly about the amount of quoting activity, which we are seeing from an increasingly diverse set of OEs. Despite new plant startup, cost being absorbed, operating income in this segment grew by 7% to $12.6 million, compared to $11.8 million a year ago. Turning now to our Engineered Products segment, sales were up 39% compared to a year ago, driven by a combination of organic growth of 24% and 15% from the acquisition of Canton Drop Forge. The organic growth in this segment was driven primarily by increased customer demand for our induction heating products, both domestic and international and pipe threading products. Key indicators in the oil, gas and steel markets continue to be robust. We are also pleased with the improved results from Europe, where we have made substantial investments during the last couple of years. Operating income in this segment was up significantly in 2018 compared to a year ago, from $1.3 million in Q1 2017 to $5.7 million in Q1 2018. Operating income margin increased 390 basis points. The significant increase in profitability in this segment was due to higher organic sales levels and the impact of the Canton Drop Forge acquisition. Having said that, we are encouraged by the progress we are making in our equipment group, a historic leader in our margin profile in improving our manufacturing profitability at key locations. Bookings of new equipment continue to be strong across most of our Industrial Equipment business. Our actual bookings of new equipment over the past 2 quarters have exceeded forecasted bookings. And our backlog of new equipment and forging sales continue to grow, as the oil and gas, military aerospace and agricultural markets continue to improve. In conclusion, we are buoyed by our first quarter results, which were slightly ahead of our internal plan and are therefore confirming our previously announced adjusted EPS guidance of $3.55 to $3.75. This range reflects growth compared to last year of adjusted EPS of 10% to 16%. We're also forecasting operating cash flows to be $50 million to $60 million and capital spending to be approximately $30 million to $40 million. Thank you very much.

Well, thank you, Matt. We will now open the phone lines for a Q&A session.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Steve Barger with KeyBanc Capital Markets.

Hey, good morning guys.

Good morning, Steve. How are you?

I'm okay. First question, just -- we are on the tail end of earnings season and I'm sure you've seen a lot of the volatility around results. I think there has been a lot of investor concerns around trade wars and tariffs and rising rates. Some are questioning the strength of the cycle. So I'm just asking you Eddie, from your perspective, how real is this cycle? What are you hearing from customers? Just how do fundamental conditions look going into the back half?

Steve, this is Matt. I'll jump in on that. I'm glad you mentioned it by the way, because the political dynamic related to some of the actions the administration is taking have not been material to our results at this point. Having said that, I will tell you that we have seen some expenses, once again not material, associated with disruptions in the supply chain, not overly material or significant at this point, but something that we do keep an eye on and candidly one of the reasons we're being perhaps a touch thoughtful about the latter half of the year. So we are watching that. Having said that, that seems at this juncture to be a discrete issue, because most of our customers, as we have alluded to, in virtually every one of our end markets is up nicely year-over-year. So those issues -- the concern of the geopolitical and trade environment and growth, particularly in the U.S. but other places as well, are seen to be coexisting just now. I hope that continues.

Steve, I don't think -- it's been a very, very long time that we've had the -- again our diversification and our continual growth in the Eurozone and Asia, across all the sectors, I've never seen an opportunity and the clarity we have for particularly '18 and '19 is excellent. But I don't see any more speed or any greater increase. But where we are and where our customers are around the world, it looks very positive for next couple of years.

That's great color and I guess that's a good segue to my next question. Very strong start to the year, record revenue, your EPS from 1Q annualizes to the high-end of your guidance range. And typically EPS grows through the year. So what is the message you want investors to take away from the fact that you've maintained your guidance? Is that conservatism, is it due to the headwinds from the investments you talked about or some combination of that?

Steve, I'm sure that Ed will have a comment to this, but I think I just touched on one of the things that we're thoughtful about, which is we have seen non-material disruption in the supply chain. So I think it is very reasonable to expect that there is some risk going into the latter half of the year, related to commodities that are being touched by the administration. One, most notable one is, certainly we've seen a lot of volatility in aluminum prices related to the actions taken against Russia. So, while I would suggest to you, as I mentioned in my comments, that some of this is a little bit conservative, I would assure you that we have a reason to be.

Steve, we've been talking about this for at least a couple of years. We've been talking about '16 and '17. We've been talking about organic growth like [Tenby] [ph] transmission. We are talking about acquisitions in the Eurozone. We have piled together, between growth from the investment within our own customers and just the nature of the company, it is broad based now. We're not surprised with this. We've been talking about this. We've set this up. It's been a while. We haven't been -- we really started talking positively in the middle of '17. We did get that access to capital, did get the $350 million. That is giving us the confidence to take advantage of the opportunities there for us right now.

No. I agree, the end markets seem good, it seems like you're well positioned for this. I guess, one question about your operational position. As revenue picks up and the plants ramp, do you have the middle management bench that you need right now to keep efficiency up, to keep costs in line, so you can really leverage the volume growth you expect or do you need to do some more hiring to really be prepared here?

Steve, this is Matt. There is a lot in that question, by the way. So let's just start with where you finished. Hiring and retention is sort of the buzzword I think probably on every call you are on, so that is a significant issue. That is one which is going to continue to be a challenge, probably particularly against the backdrop of some of the immigration decisions that are being made by the administration. So it's getting worse, not better. Having said that, I do think that most of the operating leverage is coming from companies where we have been invested in and have owned a long time. So I think we have teams that not only are capable of absorbing that and seeing operating leverage and increased profitability, but I probably welcome it, because many of these businesses are cyclical and have seen times where they've seen these types of volumes. So I'm not concerned about it. I am concerned about hiring and retention. I'm not concerned about the management teams per se. I would say, though, as a caveat to that, we have discussed I think on prior calls some of the challenges we're having related to, and I mentioned them just now in my comments -- our Engineered Products group has historically been an absolute leader in the margin profile of this business and unquestionable as those revenues have returned, it's clear to us that the long, deep drought we've seen in those businesses has affected our bench and we are not seeing the margins that we would have seen historically in that business. So we got our work cut out for us and we've tried to add talent in all the right places to help our team resolve that. But it is probably the one discrete area where we're seeing -- where we're feeling some pain.

Steve, we've also been carrying for 2 or 3 years key personnel in all these businesses, waiting for this upturn. So we really didn't [indiscernible] back on our top performers and the people in this company right now. So we're not out here concerned about our team to meet the challenge. We've kept the team in place at expense, but we have been ready for this, we're ready for it and we can go deeper and deeper right now. We're all set.

That's great. I have got some more questions, but I will get in line let somebody else go first. Thanks.

Thank you.

Our next question comes from Matthew Paige with Gabelli & Company.

Good morning.

Good morning.

I was wondering if you could provide some puts and takes in your 2018 tax rate guidance and just a little more specific color there, and is it foreign jurisdictions that's keeping it a little higher than maybe it should have been?

Matt, this is Pat Fogarty. We still are estimating our effective tax rate to be 30%. I think we've mentioned on the prior call that part of the negative impact of the tax reform has to do with the interest deductibility. Most of our debt is here in the U.S. and so there's limitations on how much interest you are able to deduct under the current Tax Reform Act. That has a negative impact on our rate. There are strategies that we're planning to put in place to try to mitigate the impact of that, but clearly that is a large amount because of our level of debt that impacts the rate. So I don't know if that's helpful. But we'll continue to see an effective tax rate of about 30% throughout the course of the year.

Okay, that's helpful. And the second question from me is, we spoke a little bit about tariffs, but maybe could you speak to any potential impacts, just between tariffs from U.S. and China and on your growth plans in China?

Matt, this is Matt Crawford. Rather than suggesting the real risks and we've seen some disruption, it would be very, very hard to comment right now. It would be -- I mean, clearly the administration uses the strategy of being very aggressive and sometimes they walk it back, sometimes they don't. There is -- it is almost impossible for us to predict where this ends. Having said that, we are not be significant, material -- it's not insignificant, but we're certainly a single-digit to low single digit buyer of product direct from China. So in that sense, I think that could be mitigated at some level. On the other hand, we do a lot of business in China and we're doing more. So that is not to be sent back to the U.S., that is largely to be consumed in China. Certainly we're keeping a close eye on NAFTA. We recognize the administration is renegotiating those rules of engagement and we hope and feel strongly that his team is well educated on the complexities of the relationship with Mexico, particularly in light of some of the auto supply chain, where I think encouraged recently to see that they seem to be taking a tact that moves quickly away from things like or -- that are tantamount to border adjustment tax and more towards trying to influence wage rates within Mexico and trying to encourage some upward mobility. But candidly, Matt, it would be impossible for us to comment on this directly as it relates to our forecast and operating plan.

All right. Well, thank you for the time and good luck.

Thank you very much.

Our next question comes from Marco Rodriguez with Stonegate Capital Partners.

Yes. Hi, guys. This is Marco Rodriquez with Stonegate Capital Markets. Just wondering if you might be able to talk a little bit more in general about the CapEx and investment spends that you've been doing here recently on the Supply Technologies and then obviously Assembly Components. On Supply Technologies, can you remind us what is the CapEx exactly for and when do you kind of expect that to run its course, if you will?

This is Matt. Let me just provide some sort of strategic guidance on our CapEx number. First of all, I would say that our maintenance CapEx number, and when I mean maintenance, I mean not just keep the plants up and running, but supporting sort of the typical blocking and tackling that come with low levels of new business, has migrated up over the years. Certainly the growth in our Assembly Components group over the last 3 or 4 years have migrated that number up from sort of a low teens number to a high teens number, I would estimate. Incrementally from there, and I know we just did a forecast of $30 million to $40 million in CapEx, is chasing new business, big blocks of new business, the kind that can propel us towards our revenue growth model. So for us that is still teetering over the last few years at the high-end of the range that we find appropriate for our business. Having said, that it's also important to note, Supply Tech is a very small capital consumer. It's a business outsourcing model. They are a working capital consumer as they grow, not a capital consumer. So I think the -- and by the way, our Engineered Products group is not very much a capital consumer. So those 2 businesses are not. Most of the capital in this business is consumed in our Assembly Components group and in our Sports group. So that's why I think you'll see us feel as though -- well, on a percent of CapEx -- as a percent of sales, our CapEx numbers may not look overly aggressive compared to other manufacturing businesses. One of the reasons is because half the business doesn't require much, but the other half does. Forgings, castings and global manufacturing is an expensive proposition. So is that helpful?

That's great color. Also, just kind of wondering on the plants you're investing in, the 3 plants in China and Mexico. Where are you in terms of the build out on that?

That's a great question. And our team, I think, is doing an outstanding job, first on executing in our Assembly Components group. They are executing against a challenging business plan and launching 3 very important plants strategically for our business. So first I want to compliment them on the hard work they are doing. There's a lot of people wearing multiple hats in that business right now. They are doing a lot of travel as well. So that's important to note. I think that they are in different stages that is the answer. Our direct injection business, which we're very excited about in Guangzhou, relatively near Shanghai, is up and running had launched and it is in production with some key products. So we are beginning to see revenue streams there and have for the last few months. I think that we aspire obviously to launch enough new business to make that business meet its goals over the next 12 to 18 months, but we are in production there. I think I would comment next on our business in Acuña, in the north of Mexico. We have a facility there now. So we are able, I think, to do -- launch that business relatively rapidly. We are also in production there, but really just in the last few weeks, and also at a very low level. We expect that to be a fairly significantly sized plant. So while we are in production, I think it will take a while to migrate a lot of the business that we'd like to see there. So that is in its infancy, but also in production. Lastly, our extrusion plant in Qingdao, China, is probably the one that we're working hardest at to launch. So we're not in production of any products there at this time. But certainly hope to be so before the end of the year.

Got it. That's great. I am just wondering with the announcement recently -- just kind of coming back here, just on the components, from one of the major car manufacturers here in the U.S. not making any more productions of sedans. I mean, how do you guys kind of think about that announcement and how that might affect trends in your business there?

This is not a new trend by the way, and I hesitate to say, because I just -- I'll jinx this by bringing it up, but it wasn't too long ago we were talking about taking a significant write-off related to the Dart and the other car platform at Chrysler. So we, I guess, learned our lesson a bit a while ago about taking concentrated positions in car platforms. So I would say that while this is kind of news to the world and news to the consumer, most of the OEs have been building out these SUV platforms for a while and I think we appropriately have levered mostly to those platforms now. We love our positions on key products related to things like the Cherokee and so forth.

Got you. Very helpful. And last quick question on the operating margin --

I am sorry, we'll interrupt. I missed the opportunity which I never want to miss, and I must say -- because it's a good opportunity. We are talking about the small or medium-sized car as an issue related to production volumes in the NAFTA market. But I want to be very clear. This is an area of focus in other parts of the world. So this is -- you would get a very different feeling from our Chinese-based management team about some of the platforms they are chasing and the different profile of the Chinese consumer. So while I think it is -- your comment is important relative to the NAFTA market and while that is true globally, I want to point out that we are, as I did in my comments, we're excited about all the new OE names that we're currently quoting and in some cases have landed business with.

Marco, Ed Crawford. We continue to look at the auto industry not through the eyes of big 3 in America, how many cars are being built in America. We are looking at it through the cars being built in the world. So we think in terms of an 80 million to 90 million unit market. So what might change in Detroit for a short period of time doesn't really impact us. We are building major platforms in China and in Mexico, and they are not connected to any one particular customer. It's quite diversified. We don't believe the gas combustion engine is going to go away and electric might not be as popular. So we are looking at it from a different viewpoint. We're thinking about the world market. We're not talking about -- and we invest money and talking about this CapEx question, when we invest money in '17 and '18 it's for revenue and sales in '19 and '20. It's not being invested without a specific startup date of when that capital is going to bring revenue and profits to our company.

Got it. Thanks for that additional color, very, very helpful. Last quick question, just on the operating margins on the Engineered Products in the quarter, I did hear the comments of the comparison year-over-year and I believe you made some call out in terms of the bench there, in terms of management may not be as deep as it once was. Just trying to better understand sequentially the decline in the operating margin in Engineered Products, what were kind of the drivers there?

Marco, this is Pat. When you look at our Engineered Products group and the acquisitions that we've made over the last couple of years, some of the product mix that we're seeing has definitely impacted our margin. Our business in both Italy and Spain, which is more of a hardening business, has tended to be lower margin than our new melting equipment that you would see here in North America. So definitely there is a mix issue that has affected our margins. But when you look at our aftermarket margins, we're consistent with where we've been historically from an aftermarket standpoint. So as business continues to increase over the course of the year, I think the flow-through and our margins will continue to improve.

Got it. Thanks a lot guys. I appreciate your time.

Well, thank you very much.

Our next question comes from Edward Marshall with Sidoti & Company.

Hey, Eddy, Matthew.

Edward, how are you today.

I'm doing okay. I just wanted to follow up on the operating questions for a second. The $2.3 million re-characterization of pension to below the line, I'm curious, if we look at last years, where the way you adjusted margin comes out, would that fall through in the 3 segments. Supply Technologies is about 40%, Assembly about 40%, and about the remaining in Engineered Products. Is that the way to think about that as we kind of look at sequential margins and what that may be if you add those numbers back?

Yes, I think that's a good estimate, Ed.

Okay. I mean, you gave the year-over-year comps, but I guess the fourth quarter we could just kind of use that math, okay. If I -- Steve already talked about the supply side and what we might look at from a cost perspective. I'm curious if you could address maybe demand and is demand strong enough that you could push some of the raw material pricing through freight costs, maybe labor costs, even shipping costs to the customer, have you started to do that? Do you anticipate doing that, if you could talk to that?

So I'll touch on it. Ed, this is Matt. So I think to be candid, the question is uncertain. Certainly we are quoting new business with those ideas and thoughts in mind. A lot of people, I think, got away from thinking about inflation on dealing with long-term agreements. So I think that's clear in our mind that we need to be cognizant of that. I think it is less certain in terms of current arrangements. Having said that, I think it would be important to note that a number of our businesses have some natural hedges to at least the raw materials side. The easiest of course is aluminum, where we have always had a procedure to pass volatility through to the customer. So we take -- don't really take raw material pricing risk over the long-term in that business. I think that we could talk a little bit about our Engineered Products group, which -- both the forging business and the equipment business tend to be not long-term agreements. They tend to be ones in which we have relatively short-term purchase orders, so we have the opportunity to reprice. I would talk about Supply Technologies as one in which we generally with our larger customers have indexing in place related to raw material. So I think there are some natural hedges. A little more difficult in the auto OE business, unquestionably, on the labor side and we are seeing a little bit of inflation in the labor markets. Of course, I think that we -- they are going to look to us to be better, smarter, faster. That's the nature of the business. So I think that for a majority of the business, we have some natural hedges. In other places, on certainly raw material, I think that in the auto business and in the broader business, on labor in particular, we will continue -- have to do what we do well, which is look for opportunities to resource, look for opportunities to automate, look to do the things that set up our businesses as a sustainable competitor in the space. And the good news is, if you've got a 5, 6, 7, 8 year exclusive deal, you can make some of the investments to take that out, to take those costs out. So I guess I'm not -- I'm being a little more granular than maybe you wanted, but those are some of my thoughts.

No, I appreciate that. I'm curious to know the percent of your business that's under natural hedging.

Well, as it relates to raw material and the natural hedging is of the categories I described, indexing or customer -- contractual obligation with a customer to address fluctuations in raw material. I am going to make this up as I go, but I am going to say probably a third. Another third is probably under short-term contracts, so we have the ability to move with the market over time. And then a third we've probably exposed them on and we'll have to think through how to do what we do. Pat, is that --

No. Ed, I think that's a pretty good estimate. I think our ability to continue to work with our customers and in periods of rising material, labor and shipping costs, the leverage we have and our ability to increase prices I think is very good, for the reasons that Matt just mentioned.

And the 30% that would be exposed, what's the traditional -- what's the historical kind of capture rate with the lag generally, is that 3, 6 months, I mean how does that normally work on regaining some of their present value?

Well, I don't even know that I'd be able to comment on that. Listen, a moderate inflation is a headwind. I mean, if we are trying to suggest anything other than we are saying the wrong thing. Candidly, I think most of our management team would like more spiky volatility, because then you are forced to seat at the table. So I think that the way I would say it is, it's hard to talk about recapture. Two-thirds of the business is going to be short-term recapture, one-third is going to be a bit of a dogfight. But once again, I think we've got great relationships with OEs, and I think we've got a great system in place. So I would expect to address a significant portion of that certainly within 9 to 12 months. I think the two-thirds addresses more quickly. But should you expect there's moderate inflation, it will be a headwind.

And Matt, in your prepared remarks you talked about startup costs and the gross margin. Do you have a -- could you quantify kind of the impact of the gross margin that you saw, either from a dollar value or percentage value where we are then?

Pat and I talked about this before the call. We sort of expected that question when we read our own text and then realized that I really couldn't -- we really couldn't. It is just too difficult to get under the hood of how people are splitting their time and it just is something we can't do, but it's certainly material and we think that to the extent that our margins are. Ed, we are slightly accretive during the period on an adjusted basis, we certainly think that they will be more accretive once we get these plants up and running in 12 months or so, or profitably up and running. Two of them are already up and running. So I'm sorry we can't answer that question. But, we just can't do it justice.

Got it. You have a vision of growth for -- I think since you've started the business in 1992. I'm curious, and with that in mind, when you look at acquisitions, debt reductions and maybe some of the risks to some of the cost side of the business, do you -- have you shifted your focus on maybe targeting acquisitions versus debt reduction, just in terms of as you further away grew kind of this period?

Well, debt reduction, we've addressed that, and debt reduction, our ability to reduce debt is going to be connected directly to cash flow. We've averaged $57.4 million per year for the last 8 years, as you know, and we have given and understand that as the revenues go up and we are out there with our plan of $2 billion by 2021 run rate. And if you take the percentage of cash flow, it's going to increase along with the revenues. One thing here, we've got to remember here is absorption in these plants. We've been under-absorbed in 2 of our units for some time. We are just starting to really fill up these plants. That will add to the bottom-line and affect the company going forward a lot quicker than any raw materials as modest or aggressive as they can be that we can't pass it along. But the -- there are 2 separate subjects in my mind. Okay. And the cash flow has followed, we've been sustainable in this company for year after year after year. It's going to increase and we've got a goal of $2 billion run rate number sometimes in 2021. That is the plan.

Right. And then, that gets me to the final question. You talk about incremental margin or contribution margins. I mean, right now there's a lot of investments in the business and so I understand the near term kind of pressures to the margin, but I am curious when does the timing kind of get to that historical kind of incremental margin that we've seen from the businesses, or our contribution margin, as you start to absorb more of the fixed assets as your volume improves?

I think, definitely you just stop growing. You stop growing, that is the problem. The answer is we are not going to stop growing, I mean, it's as discussed, and we had between $20 million and $25 million tied up in CapEx in '15, '16 and '17, getting ready for the [Tenby] [ph] transmission, which is finally up and running. There is a long lead time added. So -- and as the volumes comes up there, the absorption is better and better at these plants. I mean, there is a trail between investment and revenue. There always is.

I would comment, this is Matt. And I think dad sort of summed it up. But Eddie, we've talked about the plants in Assembly Components and the desire to see them sort of -- that's going to take 12 months or more to tour into where they can be contributing at an accretive level, or maybe 18 months. But so I think that's timing. But I also want to back up and comment on Supply Technologies. We talked a little bit about and this is I try to warn people as often as possible to not overly focus on margin and operating leverage in that business and part of the reason is, this is a classic case during the first quarter where we saw tremendous growth and tremendous flow-through of margins, and tremendous return on invested capital. Those guys did a great job at Supply Technologies. But a lot of that came through. I think most robust end market was truck. And truck, because of their volumes and because of some of the product mix is a lower margin account. We like it, we like the return on invested capital. We have been a partner with our key customers for a long time. But -- so I think we can claim sort of victory if you will in terms of a very good operating quarter and still not suggest that we have seen massive flow-through at the margin line. And some of that has also to do with some of the expenses I discussed in some of the growth areas and adjacencies. But the point is, I'm using this as a story to suggest that particularly it's Supply Technologies, which is dilutive to our overall margin and when a great end market like truck is doing well, it could be more dilutive. This is still good news and these guys are operating at a very high level and should be complimented. So it doesn't -- the good news doesn't always flow through in the margin line on a consolidated basis. Does that make sense?

Yes. I appreciate your thought guys. Thanks very much this morning.

Thank you very much

Ladies and gentlemen, this concludes our Q&A session. I would now like to turn the floor back over to Mr. Crawford for closing comments.

Well, thank you very much. It's been an exciting period here at Park-Ohio as we start into the reporting cycle of '18. We really had the wind behind us, as they say, at our back, and we're looking forward to a lot of success and we're very pleased in the overall excitement in all of our customer bases, which is substantial and our advancement in the Eurozone and particularly in China and Mexico. So we are firing on all cylinders. We really have been waiting patiently for 2, 3 years to get this momentum going and we are very, very happy as we look down the runway here for the success in the company in '18 and '19. Thank you very much for the support. Good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.