Good morning, and welcome to the Park-Ohio Fourth Quarter and Full-Year 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 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 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 would now like to turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Well, thank you. Good morning ladies and gentlemen. Welcome to Park-Ohio's conference call. I'd like now to introduce Matthew Crawford, the President and COO of Park-Ohio. Matt?

Good morning, and thank you very much. Overall, 2017 was a good year for Park-Ohio. Our operating performance improved year-over-year. We met our internal operating plan, so we completed several actions to position the company for long-term success. As you'll hear more, a little bit later, we're excited for 2018 and expect significant growth in revenue, operating income, and EBITDA. Specific achievement during 2017 include, we achieved sales of $1.4 billion representing a year-over-year growth rate of 11%. We grew adjusted earnings by 7% and EBITDA by 15%. We continued our track record of strong operating cash flows delivering $47 million; we refinanced our senior notes and revolving credit facility creating expanded capacity and more favorable terms. At December 31st, we had almost $200 million of unused borrowing availability and over $80 of cash on hand. We continued making strategic acquisitions during 2017 to complement our existing businesses with expanded product offerings, markets, and customers. We invested nearly $30 in capital, much of which is focused on business expansion. And already this year, we completed the strategic acquisition of Canton Drop Forge. And yesterday we announced 2018 earnings per share guidance that represents a 10% to 16% adjusted earnings growth over 2017. Going back to our 2017 full-year results, again, net sales were just over $1.4 billion, an increase of 11% compared to a year ago. This increase was driven by a combination of organic growth, which was 5%, and acquisitions which contributed 6%. Gross margins as a percent of sales increased by 70 basis points from 15.9% in 2016, to 16.6% in 2017, the increase was due to the increase in sales volumes and operational improvement initiatives implemented throughout the year. SG&A expenses increased year-over-year due to SG&A associated with the acquired businesses. However, as a percent of sales,…

Well, thank you Matthew. Before we get into answering questions, I would like to point out that in press release I used the quote that Park-Ohio has a great issue behind it. I have got a couple of questions what exactly that means. What it means is what we have been doing for last 25 years to get ready for this opportunity which exists today. I do not think the company has ever been in the position to take advantage of hard work around the globe setting the table for the future. I would like to take a moment and share some of our thoughts relative to the future, the current management thoughts particularly in the next four years. As I said, the table is set. There is wonderful opportunity. We have our bank finance. We have got the balance sheet in the right position. We have added some key players to the team, and we do have what I call the hand fork plan. The next four years. If you go back to Matthew's comments, 2017 the sales were up obviously by 11%. In the last eight years, revenues averaged going up 8.8% that's a nice number. And again, we believe the next four years we are going to average 10% or more growth in sales. And I'll give you some highlights on how we expect to do that. This is not something that's pie in the sky. It's a reality and I'll share that with you in a moment. Reaching a run rate as Matthew indicated 2 billion is a solid goal in our mind. Run rate $2 billion 2021 some time and accompanying that will be a 10% EBITDA. You can do the math for yourself. What's particularly interesting to me is that we have taken this…

Thank you. [Operator Instructions] Thank you. Our first question today comes from the line of Christopher Van Horn with B. Riley FBR. Please proceed with your question.

Thanks, good morning, this is Dan Drawbaugh on the line for Chris. I appreciate you taking our questions, and congratulations on the Canton Drop Forge acquisition.

Thanks, Dan.

Just to start on Engineered Products segment, coming off that acquisition, looking ahead, you've made two acquisitions there fairly recently, GH and now Canton. I'm curious to know what you are -- and you've also got sales ramping pretty quickly. So I'm curious to know what you're thinking about the margin profile for their medium term. I think this used to be a mid-teens margin business, ramped at something like 200 basis points year-to-year in 2017, what should we be thinking about in terms of that margin profile going forward?

Dan, this is Matt, thanks for your question. So I think that both acquisitions are accretive to the current margin profile of that segment. Just to remind you there's two different businesses in that segment; one is the Forge business, where Canton now participates. Canton will be accretive to the Forge group profile. In general, that business still struggles with some weak demand in a few areas. We have begun to see a return, for example, in the freight car space. We have seen a little bit of pick-up, but not much in the locomotive build space. So Canton, I think, has a nice diverse set of customers. While they're well below peak revenue numbers in their own history, or even their own recent history, they bring a nice diverse portfolio including commercial aerospace to the company at an accretive margin. But in general, those businesses are still operating at under capacity or under utilization from what we're accustomed to. The other part of the business you mentioned is where we added GH. The induction heating business affected largely by the global steel markets, which has been a bit of a hot topic lately, as well as oil and gas, have seen some soft demand numbers recently. So GH was part of our initiative to continue to augment the heat treat side of the business. And heat treat, I think the hardening side of the business, if you will, had been a great investment for us because it has been exposed to things like automotive and aerospace, and other production environments that have been more robust. So they participate in GH in a part of the company that, once again, has been struggling a little bit with soft global demand in some of those core commodities. And they've brought a nice diverse exposure on the hardening side, and candidly have brought a book of business and the management team that also will execute at a level which is accretive to the historical margins. So I think my point is -- the specific answer to your question is we've sort of buffeted those businesses with some good additions, but we'd still like to see additional demand flow through the operating leverage in our Engineered Products is the highest potential of all of Park-Ohio, so. And the incremental $10 million or $20 million in business there does a lot of good for us.

Okay, thanks. I appreciate the color. That's very helpful. And then you mentioned just in your prepared remarks $100 million sales goals for aerospace. I'm not sure if I missed this, but can you clarify for us what that compares to right now?

Yes, we started this initiative a little over a year ago. And just to back up, for those that don't recall or weren't on the call at the time, we identified aerospace for Supply Technologies as an end market that we felt we should enter. We liked some of the margin profile characteristics and we liked some of the growth opportunity there. Supply Technologies has traditionally cut its teeth on what we feel the toughest part of the industrial market, right, which is trucks, and snowmobiles, and semiconductor tools and things like that. That initiative we knew was going to be organic, but also we would do some small acquisitions as well. We've done a couple. So we're really pleased today to suggest that we are well on our way to meeting that $100 million goal which we announced about a year-and-a-half ago. We did not disclose how far long, but I think I'm comfortable in saying we're at least halfway.

Okay, thanks. That's fair enough, thank you. I'll go ahead and step back in queue. I appreciate the questions.

Thanks, Dan.

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

Good morning, Eddie. Matthew, how are you? Patrick, if you're in the room.

Great.

I am here.

He's here.

Good. So I wanted to talk about the SG&A, talk about maybe -- I mean I know there was an initiative to streamline the organization, and over the quarter as we saw that. But as I look out into guidance for 2018 and I kind of think about where we were in 2017, I would've thought with the volume growth that you're seeing on the top line we would've seen a better operating leverage as we move through the model. I'm just kind of curious about your thoughts. Maybe what added to the business or maybe what changed relative to kind of that streamlining the organization following the issues with Dodge and Chrysler.

Yes, and I'll jump in on that. And then Pat can clean it up at a more granular level. But let me just comment again briefly on the fact that we do have some businesses that are suffering underutilization where we are continuing to support networks of aftermarket services and equipment builds particularly as it relates to Engineered Products and forging facilities, high fixed cost facilities, not just in that group but across the business, were waiting to return. These are really high margin profile businesses that are not operating optimally. So we are committed to being long-term investors here. And we've discussed on prior calls the importance of keeping and retaining and building key management teams to build this business into the future. So I continue to think that we're not in an optimal profitability environment, number one. Number two, we're executing on a growth plan across the business. I mean we've talked a lot about our new plants in Mexico and China. Those plants don't build themselves. These are expensive projects. They have some CapEx associated with them, and they also have significant expense before you get one dollar of revenue. You know it's great to do an acquisition, plug-n-play, you get to pro forma the results, and you're off and running. Building plant is not cheap, and it's not easy. So we are executing against a significant growth strategy in our Assembly Components group, and that's going to cost some money. So, against that backdrop, I would tell you that I think the operating level associated with the high single-digit growth rate and almost double that on the profit line isn't all that. So I'm willing to defend that particularly against the backdrop of those two items. Pat?

Yes, the only thing that I would add to Matt comments, that is that the increase in the SG&A levels that we're expecting are primarily a result of the acquisition SG&A which operate at a slightly higher percentage to sales than our historic levels. And also there's increases in amortization associated not only with the acquisition and the amortization of the intangible assets that we value, but also in certain employee-based share compensation amortization that we expect in 2018.

Let me add to that a little bit. You're correct. We've taken the brakes off cost reductions and restructuring six months ago. We've anticipated this run that we're looking at right now and we're looking at in the next four year. And we did our share and more in reducing cost, and so forth, that's the way we operate the company. But this is different now. We've got to be prepared for the future. It's going to cost us some money to prepare for the future. It's going to cost us some money to get new engineers in here to handle some of these new products. So we are fully aware of the fact that if you look at it from your viewpoint you're correct. Yes, the brakes have been off for six months. We're building the team to be a $2 billion company.

Got it. So if sum up what I think I'm hearing is, the investments today that ultimately get you to that 10% EBITDA margin on the $2 billion volume growth over time, and you're not seeing it because we're early on in the investment period is -- is that kind of what you're saying?

Yes.

We are saying that, but I want to reiterate what I said. Operating leverage that's twice the rate of growth is -- I think we need to recognize that's not bad as we're accomplishing the other things as well.

Got it. In the 2018 outlook, I'm curious about both organic growth that embedded in the sales outlook. And I missed if you've mentioned the interest guidance for '18?

I'll let Pat take the interest guidance, but I will comment -- this is Matt, on the growth. I thought it was interesting, we've sort of suggested that, long-term, our growth has been to split relatively equally. I think it was notable in my prepared comment that we talked about the fact that it almost was exactly even in '17, and even in the fourth quarter of '17. So I don't think there's anything that would suggest that that long-term average is going to change in '18.

So, 4% to 5% organic growth and the rest coming from the acquisitions that either remains -- late in '17 and early '18?

Yes, right.

Okay.

Yes, Ed, this is Pat again. I agree with that. And also to address your interest question, keep in mind that a large portion of our debt is bond interest at a fixed rate. So the increase we're seeing in interest expense is a result of the cost of acquisitions. And we see our effective borrowing rate because our debt at that level is lower than our bond debt, we see it lower. But overall, the increases in interest expense are going to approximate $1.5 million to $2 million, and that assumes some rate increases that the fed most likely will pass through this year. But we do expect to see our effective borrowing rate decrease year-over-year.

Got it. And then final one from me, I just wanted to talk about -- I think you kind of came close to it before with the steel comments. But tariffs, your initial thoughts on any actions, and with the limited details we have today, is it positive or negative for Park-Ohio. And then I guess as it relates to Engineered Components, how you see it kind of flow through that?

Well, as far as steel and aluminum it impacts us. Again, I am not as concerned about the aluminum aspect of it because in most of our contracts we have the pass-through, and that's indexed on plats which is always daily in the New York metal markets and so forth. So, that is -- we have yet to hear in the sense when you're in -- the Supply Technologies there's a lot of fasteners, there is lot of fire passes, I mean there is lot of steel, it's where that is going to be a burden. But in all cases we have the ability to go to our customers, taking the bigger ones, and get an adjustment in the price. But this is a long way from being resolved. Obviously if you spend any time watching TV or anything -- I was in Washington recently, there's no real answer to this yet. This is a game, and we're going to plan to just keep doing what we're doing here, and it'll affect us. But it's not a big scare from my viewpoint. We'll make it up in other ways in either both categories.

Okay. Thanks guys. Appreciate it.

Thank you.

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

Hey, good morning guys. This is actually Ken Newman on for Steve. Thanks for taking my questions.

Hi, Ken. How are you doing?

Good, Eddie. Thanks. I did want to talk a little bit about what you're seeing in the M&A market from a deal perspective, where are you seeing the interest? And curious if you are, as you're looking at these deals that are coming on to your desk, are you more inclined to look out to build out Supply Tech or Engineered? And where are you seeing the better multiples?

Well, number one, I think there's been a general settling in the multiples that private equity are willing to pay. I mean, a year ago you were scared with the nines and nine-and-a-half in cash flow, there was -- but right now there's not quite the enthusiasm. Maybe they're run out of places. Private equities to be three or four years in flip. It's flipped the strategics. Well, there's no strategics around so it's one flipping to the other. So it's coming down. But our particular, we're moving into a niche, I know it doesn't sound like much, but $50 million, $60 million, $70 million, $100 million deal is in our core spot, especially if it's a bolt-on. But I think we're getting some relief. We've done better in the last two acquisitions than we ever would've expected. They're terrific. We paid a fair price, but a lot of good things are happening in that area. But the deal flow is robust. And there are a lot of broken deals out there with private equity where they took them right to the altar once or twice in the last 18 months and they're not going to transaction. So they come popping back at us, and we're known for being smart, and quick, and fair. And we have the ability to close. So I'm excited about it. But there's never -- my point out there is, never thought here at Park-Ohio that we prefer acquisitions or we prefer bolt-ons or we expect organic growth to be -- we just go where the best opportunity is for the company, so there's no set way up, where we're going to grow. And we're going to do this $700 million. It's not set in stone; it'll be 50-50. The set in stone is the best transactions, every single one. But the flow is great. It's solid. It's at least a point point-and-a-half below what it was a year, year-and-a-half ago when we were just sitting here with all that money. We went out and got that $350 million to do something, and what did we do? Zero. So fortunately, why? Because, as you know, I have large shareholders in the company. Hopefully that answers your question.

No, that's great color. So I guess as a follow-up to that, I mean as we think about the acquisition revenue that's built into your guidance, can you help us think about where historical revenue has been for Canton Drop Forge as we look at our models for engineered? And I guess where -- is it correct to assume that there's no other additional deals that are built into the guide?

Ken, this is Pat. There is no additional deals built into the guidance. Our guidance reflects the acquisitions that we've previously made, including the Canton Drop Forge deal.

Got it. Okay, and then you talked a little but about it in your floor plan. But if the up-cycle kind of runs the way it has for a year or two, how are you thinking about the growth rate that we can expect out of these businesses, especially as they're kind of coming off of cyclical lows here?

This is Matt. I think my dad mentioned a few moments ago about the long-term average of being just under 10%. And that goes back to 1992. I think in this environment maybe we can do a little better than that. We're projecting something right about the long-term average this year. I think that in a robust environment we'll do a little better. And in a weak environment we'll do worse. But I don't think that's -- I think the long-term average is pretty indicative as a midpoint of how the company operates.

And think of it -- I thought of it this way yesterday.10% of a company doing $500 million is a little different than a 10% of a company doing $1.6 billion, a big number. You're talking numbers of $165 million and $170 million, and it's high to get to that goal, that N4 [ph], you're talking real numbers here. So it's not quite as easy. 10% of a bigger number is a bigger number. Okay, and if you want to maintain a 10% EBITDA. And you want to maintain a cash flow, and if you want to keep your -- it's not that easy as we just --

That's good to hear. One last one from me, you talked about some solid growth in your backlog in Engineered. Can you just talk about the order enquiry in that business, and how is that backlog starting to fill out as we are almost through the first quarter of this year?

This is Matt. I'm looking back through my notes. I think I gave -- as of December 31, 2017, backlog in the segment was $173 million compared to $138 million a year ago. So I think that is precise as I want to get. But for what it's worth, I would mention that the early part of this year has been consistent in terms of the strength we began to see in the latter part of last year.

Great color. Thanks.

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

Good morning, and congrats on a nice quarter. You mentioned some new markets, like aerospace. Are there any new products you had to invest in to get into that market? And maybe also the inverse, have you taken a look through the portfolio and found anything that you don't feel belongs in the future of Park-Ohio?

That's a good question. The aerospace investment, we've traditionally had some exposure to the aerospace investment, particularly in the Engineered Components group. So a business like Canton, which is a forging business, we've had exposure to that. As I mentioned in my comments, we have sort of a sister company to that in Chicago, named Kropp Forge. So I would not say that there's a significant different manufacturing process. I think it brings more forging applications in aerospace to our portfolio. I would say that on the supply tech side it's an excellent question. And yes, we are introducing products which are new to our portfolio, having said that, our core competency there is supply chain management. So we are less in that business about designing and developing innovative products than we are about managing and improving the efficiencies of our customers and their supply chain. So I would say to you, as we look generally in the forging business, we are adding new customers and new products in a business we know. And then in supply chain I think we're just tweaking our already pretty solid and deep expertise in supply chain management to slightly different products.

Got it. Thank you, that's really helpful color. And the second question for me is, you mentioned some limits on interest deductibility from a tax perspective. Does this limit your ability to do future acquisitions until you can pay down some debt, or how do you think about that?

No, Matt, I don't view it that way at all. I think the tax reform really panelizes companies with U.S. debt. And as we look at our business in the past, we've grown all over the world and financed that growth with U.S. debt. Really what this will require us to do is to look at areas in the world where we can finance that growth in those particular jurisdictions and not use U.S. debt to finance that growth. And we have been down that path and we continue to work towards that. As you may recall, when we bought GH, we financed it with European debt. We are going to have to continue to do that and the markets will allow us to do that. So, this just throws a what I would say a short term wrinkle into our effective rate, but we are working hard to bring that back into line with where we would expect it to be in the high 20% type range.

All right. I'll look forward to speaking with you in the future.

Thank you.

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

Good morning, guys. Thank you for taking my questions.

Good morning.

Just a few follow-ups, in regard to the drag you got to see in this last year, so on the under capacity you experienced, is there any way you can maybe help quantify or help us better understand what sort of a drag that was in '17?

Yes, Marco, this is Matt. I mean I think we have experienced that largely in our engineered products segment. So, you are certainly welcome to go look back at our segment reporting over the last seven or eight years and see from the volatility some of the peek numbers in that segment. We are operating fundamentally the same business as we were. Perhaps, actually little bit with the addition of some of the acquisitions. But that might give you sense for what the gap could look like. So that may be one way to identify it. Having said that, as it relates to some of the under capacity, some of the expenses related to some of the expansion whether it would be a supply technology or assembly components, those are significant numbers but not ones that would sort of readily identify as they are we expect them to be relatively short term meaning the next 18 months or so.

Backing Matthew's comment of the -- I am going to try to figure out exactly what do you mean by drag, but engineered products we have made it clear that this is -- it's just down in volume. And this is a company historically was 15% EBIT type -- EBITDA type of company. It came down 9% or 10% during this whole period because of parts and service. So, it was a drag on one aspect of it. And it's the sugar on the cake when you are having your parts and service around the world going great and you are not selling capital equipment. So that drag is being lifted by the increased activity that we see coming in capital equipment with all our units particularly in the Euro zone.

That's helpful. So, the assembly components side then, did you fill all that capacity that had there when the client ended of the life on two particular products, is that how we should think through that as we are exiting '17 and enter 18-19?

No, that's not the correct conclusion. I'll try to answer it this way that of all the capacity we had and the ramp down over three-year period of capital equipment going to the steel industry that da, da, da, around the world and gas and oil and other areas and we haven't even really started to touch that. So, we have re-engaged do we have capacity that let's say it's 25% of the availability still.

Then when we think about your longer term guidance here, the 8% to 10% or the 10% goal to hit the 2 billion, maybe if you can also talk in regard to your current guidance on '18? Maybe if you can kind of rank the top three opportunities you see in terms of easiest to slightly more not as easy I guess?

Well, let's put it this way. We talked about different categories -- different parts, different parts to the world, obviously we expect a lot of good things to happen in Asia and happen in Mexico and the Euro zone. And I think North America won't be quite as spry, but that could change in the next 30 days. It's hard to answer that question. As we sit here today everything looks like it's on an upturn. We'll have some disappointments obviously. You will have disappointments in quarter-to-quarter and month-to-month. But in reality, I would like you to just look what we are saying as an operating company, and as a private equity company that we can share the shift to four years at a 10% growth rate and 10% EBITDA. And that shouldn't be that difficult for us. We've been doing it for years. So I don't want to pick up one area that I think is going to outperform the others. I think it's holistic.

I may one thing, Ed, if you don't mind; I think that maybe a little bit different this year than in the past we are expecting support and growth in all of our key business units. I think that what we have seen over the last couple of years is decidedly more favorable automotive environment, which is our single largest end-market, and we benefited from that, while others have sort of lagged the touch. I think that while I agree we wouldn't want to highlight any particular business, I think that we are seeing a nice broad-based resurgence across the business, and I think that while that maybe mitigated a touch by a slight follow-up in sales for automotive in NAFTA region, I think we feel very comfortable about the investments we've made globally into the auto market. So, and also in key technologies I discussed that address the hybrid market and the regulatory environment in multiple areas of the world. So, we are pretty comfortable this is broad-based at this point, which is nice.

Very helpful, thanks. And last quick question if I might, when just kind of looking at the overall major risk for you guys, I mean, where if you can rank top two that you might be thinking about where you'll spend most of your time focusing to make sure those risks are mitigated into '18?

I would jump in and just say that we are starting to see some more favorable demand as we've mentioned in the engineered products group, which does have the highest operating leverage. Risks associated to execution, while that business, as we just mentioned, we benefited in our earnings in '17 from significant cost reductions in '16. We got a ramp up again. We got to get prepared to take the work that we are now getting and doing it at the expected margins; much more difficult, much harder to do than to say it. I also would - I need to take -- Matt away at the seat of the President, but any geopolitical issue relative to -- well, anything, but in particular we like a little bit of inflation; a little bit of inflation is good for manufacturers. It's a good front market. You don't want somebody to be able to under touch you, because we are in a deflationary environment, and wake up everyday you know, worried about next competitor, but certainly significant disruption in the marketplace relative to raw material pricing would be a challenge. Even though I think we have got indexes, and we are in a great gist with our customers, it would be disruptive.

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

Thank you.

Thank you. At this time, I will turn the floor back to management for closing remarks.

Well, I want to thank everyone at the company, particularly all of our employees, and I'm surprised and excited about some times seeing the printout of all the employees that work for our company, including hourly employees that show an interest in our doing, maybe just -- maybe to hear Matthew chat or whatever. But generally speaking, I'll leave with this note, [indiscernible] and it's real important the final look the downside is -- we are in the downside in the plan as we have outlined. I urge you as I'm not overly optimistic to look at the upside of the company. And what the potential is of us meeting that. Again, $2 billion, 10% EBITDA, cash flow 45% approximately of the EBITDA, this company will be funding itself a very few and very quickly. So it's a plan. It's not concrete, but it could be better, and it could be worse, but it's not going to knock us out one way or the other. I appreciate everyone's support and particularly the officers of the company and our employees, and we are looking forward it. We are going to go after this plan. It is the plan, but we believe we can accomplish it. Thank you very much. I'm looking forward to the next meeting.

This concludes today's Park-Ohio conference. You may now disconnect your lines at this time. Thank you for your participation.