Park-Ohio Holdings Corp. (PKOH) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Park-Ohio Second 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 would now like turn the conference over to Mr. Matthew Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Good morning and welcome to Park-Ohio's second quarter conference call. Joining me on the call today are Ed Crawford, our President and Pat Fogarty, our Chief Financial Officer. We're pleased to announce that we set a number of records during the quarter including sales of $432 million and EBITDA $41 million. Additionally, we set a record for adjusted EPS for the first six months of 2018 at $2 a share. Our success during the quarter was in line with our goal to achieve long-term double-digit profitable revenue growth. Our strategy focused on achieving these goals by investing and growing global geographies and end markets primarily through our current portfolio which included diverse set of industrial businesses which have strong product portfolios and are recognized leaders in our categories. Additionally, we target the acquisition of profitable, industrial companies which complement our current businesses and have strong reputations, a loyal customer base and often have developing technologies as well as other synergies. So far in 2018, we have added one such acquisition Canton Drop Forge and we're pleased with our contributions to-date. Going back to the second quarter results, we saw increases in revenue across all segments. While we had anticipated improved year-over-year results, we were ahead of our own expectations. Supply Technologies continued to see broad strength in most end markets organic growth of nearly 10% was excellent and included 40 new customer accounts of both the production and MRO business lines. Assembly components operating results were slightly behind a strong second quarter of 2017 largely because we continue to absorb expenses related to the startup of three new facilities in China and Mexico. Two of three facilities are now open and are in the early stages of achieving profitability. Engineered components traditionally a late cycle business continued to see improving volumes in the equipment business which benefits from the improving fundamentals in commodities and business expansion. This segment also benefited importantly from the acquisition discussed earlier. Looking forward, we're committed to our current business portfolio and believe three investment teams will continue to emerge as we move into 2019. First, we see tremendous opportunity in the migration from internal combustion engines to electric propulsion as well as related advancements and emissions technologies like light-weighting direct injection and advancements in plastic and rubber hose technology will continue to play a bigger role for Park-Ohio. Secondly, we will continue to expand our products and services in our supply technology segment aimed at reducing our customers total cost of acquisition. Investments in MRO, mid market and aerospace are current examples. Lastly, we will continue to investment globally in our forging assets and induction assets which provide unique manufacturing capacities and technologies and provide excellent diversification into military, agriculture, commercial aerospace and global commodities. In short, these businesses have wonderful strategic motes [ph]. Turning toward our outlook, we're pleased to increase our earning's guidance for 2018. This is consistent with the strong demand from most customers as well as the early signs of benefits from key investments in all three segments. While our view is positive, we are somewhat cautious, particularly given the global trade environment and the related tariff actions. We're currently feeling the impact of those tariffs at a manageable levels, but are watchful for developments. And finally and most importantly, I want to recognize the hard work of our team mates around the world, who have gone above and beyond to meet increasing customer demands, launch new products and build new factories. Thank you very much. Now I'll turn it over to Pat to discuss the specifics of the quarter.

Thank you, Matt. As Matt stated in his opening remarks, the second quarter was a strong quarter, we continue to build on the momentum that we saw in the first quarter and we delivered strong financial results for both the quarter and year-to-date periods. Our net sales of $432 million in the second quarter was an increase of 23% year-over-year. Off the increase 13% was due to organic growth driven by increasing customer demand in many of our key end markets across all three business segments and the remaining 10% was due to the Canton Drop Forge acquisitions and the acquisitions completed in the second half of 2017. Gross margin as a percentage of sales was approximately 17% in the second quarter in both 2018 and 2017. We realized very good operating leverage and income flow through in many of our businesses. However second quarter margins have been impacted by continued new plant startup costs, unfavorable sales mix in certain product lines and higher commodity prices driven largely by tariff related price increases. Despite these increases in cost, we still achieve the gross margin 17% which was almost 100 basis points higher than our first quarter 2018 gross profit margin. Second quarter SG&A expenses were $48 million or 11.1% of sales, this year compared to $37 million or 10.6% of sales in the prior year. The increases were driven primarily by SG&A related to businesses acquired in the past year and increased cost associated with higher sales and profit in 2018. Operating income was $25.3 million in the second quarter, an increase of 12% from $22.6 million last year due primarily to the higher sales volumes in the quarter. Also in the second quarter, we sold our old assets for cash proceeds of $2 million resulting in a gain of $1.9 million. The gain on these transactions which impacted EPS by $0.11 per share is excluded from our second quarter adjusted EPS. Interest expense was higher in the second quarter compared to the second quarter of 2017 resulting from higher average borrowings as a result of recent acquisitions we've made. Conversely our average borrowing rate decreased by 30 basis points driven by our debt refinancing in April of last year. Our effective tax rate in the second quarter was 27% compared to 38% in the second quarter of 2017. The effective tax rate for the quarter is lower due to the favorable impact of the US Tax Act. For the full year 2018 we expect our effective income tax rate to be approximately 30%. Our gap earnings per share in the second quarter was $1.18 compared to $0.24 in the second quarter of 2017. On an adjusted basis, our second quarter EPS was $1.08 up 24% from $0.87 in the prior year. Our year-to-date cash used by operations was $1.3 million while strong customer demand thus far in 2018 has increased our working capital needs, our networking capital days were essentially flat year-over-year. During the second quarter, we completed an amendment to our credit agreement, which increased our revolver from $350 million to $375 million and also increased various supplements for our Canadian-European businesses. We ended the quarter with strong liquidity including cash on hand of $88 million and approximately $172 million of unused borrowing availability under our global banking arrangements. In the second half of 2018, we expect to generate $40 million to $50 million in operating cash flows from profits and reductions in working capital. This second half cash flow will be used to fund CapEx needs for the remainder of the year and reduce our net bank debt position by approximately $20 million to $25 million. We expect CapEx for 2018 to approximately $35 million to $40 million. Now let's look at your segment results. In Supply Technology, sales were up $24 million or 17% year-over-year organic growth accounted for 9% and 8% came from acquisitions made during 2017. The organic growth was driven by higher customer demand in most of our key end markets, including the heavy duty truck market which was up 30% year-over-year and the aerospace market which was up 27% year-over-year. Also we continue to see the increasing sales from our middle market sales and new product initiatives. Our average daily sales were up 18% for the quarter and 23% year-to-date compared to the prior year, which reflects the increasing customer demand for our products. Also in this segment, our fastener manufacturing business continues to perform well with second quarter results in line with strong prior year quarter. We're continuing to see strong global demand for our proprietary products in this business. Our self-piercing and clench technology is gaining the acceptance of many customers as applications using this technology continue to expand with the increased usage of light-weight materials. Operating income in this segment increased in the second quarter to $13.5 million from $11.8 million a year ago an increase of 14% driven by the sales volume increases I previously described. Operating margins as a percentage of sales declines slightly year-over-year from 8.3% to 8.1% and were up sequentially from 7.8% last quarter. Now I'll turn to Assembly Components segment, sales were up 22% year-over-year in the quarter driven primarily by higher sales volumes in our aluminum business. The improved sales in our aluminum business were due to expected increase in volumes, on products launched in 2017 primarily on high volume platforms which use 10-speed transmissions and the increasing demand for compact crossover SUVs. In the second quarter our fuel related and rubber product revenues were down slightly in certain of our domestic facilities which were affected by end of life programs. Our three new production facilities in both China and Mexico are progressing well and in line with our expectations. We're operational in two of three new plants and expect the third production plant which is located in China to be operational by the end of the year. Our current projections continue to show a steady sales ramp up beginning in 2019 and we expect to exceed $100 million revenue run rate in 2020. Segment operating income decreased year-over-year from $12.5 million in the second quarter of 2017 to $11.7 million in the second quarter of this year. Operating income margins declined from 9.9% last year to 7.6% in the second quarter of 2018. These decreases were due to the impact of startup cost related to our new production facilities in China and Mexico, unfavorable sales mix and raw material prices increases resulting from US tariffs on certain imported raw materials. And finally in our Engineered Products segment, sales were up 37% compared to a year ago driven by a combination of organic growth of 13% and 24% from the acquisition of Canton Drop Forge. The organic growth in this segment was driven primarily by increased global demand for our induction hardening and pipe threading equipment. Our backlogs in our capital equipment and forging businesses continue to be robust and are expected to be strong throughout the second half of the year. In the month of July, we experienced a record level of new capital equipment orders which will benefit the second half of 2018 in the first part of 2019. Operating income in this segment was up significantly in the second quarter compared to a year ago from $5.5 million to $9.5 million. Our second quarter operating income margin of 8.4% is an increase of 170 basis points year-over-year and 270 basis points sequentially. The significant increase in profitability of this segment was due to an increase in planned absorption resulting from higher sales levels and the impact of the Canton Drop Forge acquisition. Finally I would like to comment on our revised guidance. We expect continued strong sales and earnings in most of our businesses, in the second half of 2018 as strong demand continues in our key end markets. Based on our current outlook for the second half, we're revising full year 2018 adjusted EPS guidance to $3.80 to $4 per share, an increase of 18% to 24% compared to 2017, adjusted EPS of $3.23. Now I will turn the call back over to Matt.

Great. Thank you very much, Pat. As you can see, we're happy with the quarter, but actually quite a bit more focused on the investments and the opportunities as we head into the second half of the year and into 2019. So with that, we'll turn program over to questions.

[Operator Instructions] our first question comes from Christopher Van Horn with B. Riley FBR. Please state your question.

Good morning. This is Dan Drawbaugh on the call for Chris. Thanks for taking our questions. Just to start on.

Good morning.

Just to start on trade and tariffs, it's been few months since we last talked about this and obviously the situation has developed pretty significantly since then. Just curious to know what you're thinking about the recently inactive tariffs potentially impacting costs, potentially impacting the competitive environment and any conversations you've had with customers about how the tariffs may impact pricing or sourcing.

Dan, I'll take the first shot at that, this is Matt. This is a very fluid and complex issue. As we mentioned in our comments, we did see an impact in the second quarter. We viewed it as manageable in the context of the overall company, but it is not insignificant and there are fair to describe relatively fierce to negotiations obviously on both sides of the supply chain with our customers and with our vendors to try and not position ourselves as the shock absorber on this particular issue. So candidly I think the swiftness with which the tariffs have been imposed have made it difficult to further full supply chain to sort of metabolize it and so, I think what's currently in place as we mentioned is manageable, I think that it will be probably end up being absorbed by multiple parts of the supply chain. I think you've heard and particularly in the auto space people talk about increased pricing coming through to the consumer. So once again I think it is a very fluid situation but manageable and certainly a headwind at some level. Having said that, the additional potential tariffs once again I think are a little bit fluid in terms of what will exactly be enacted, so there is some concern there will be additional pain cell by our business. We don't really know the size and scope of that, obviously some of the products being discussed and addressed are related to rubber coming out of the Far East that could potentially cause us some additional pain. I continue to think that in the context of the overall business because we're localized production in so many parts of the world, most of our business in China is for China consumption. So because of the nature of those localized production facilities, I continue to think we will be able to manage our way through it, perhaps absorbing a little pain along the way. Secondary issue I would mention is, I don't know if it's embedded in your question. But are any of the robust sales funnel in our equipment business related to some of the tariff actions and that's a very interesting question. I would say, while I don't think we have direct evidence today that we're seeing more equipment orders because of the tariffs, you have seen some indications from major domestic steel suppliers and international to increase their capacity and restart plants in the US. I can't tie to any specific orders there is no question, that a more profitable, domestic, metals industry will benefit us in some way. So that we view as a positive. Was that helpful at all, Dan?

Yes absolutely that's very helpful, thank you for all the color. And then just to turn to the guidance, as I look at what you put up in adjusted earnings so far for the year $2 that gets you annualized to the high end of your new guidance range. I'm curious as to what end do you also mention that startup costs have been negatively impacting margins so far in the first half, I'm curious as to what you're thinking about the startup cost in the back half of the year. Potentially what you're thinking about sales and cost cadence going forward into third quarter and fourth quarter.

Dan this is Pat. I'll take that question. We continue to see in the second half of the year continued startup cost in our three new plants. As you build the plants, the need to hire people, the need to ramp up production to less than what would be the optimal capacity in the plants, will continue to be somewhat of a drag throughout the rest of the year and then we expect 2019 to be in real production mode. So I would say that the startup cost will continue and we've considered that as part of our guidance.

Dan I'm going to probably speak out of turn and some of the people that run this business will probably not agree with me. But I'm just going to do a swag and tell you that, if you think about our goal that Pat reiterated earlier in excess of $100 million in sales by 2020 and apply 10% or 11% which is the corporate SG&A rates, that's $10 million or $15 million worth of cost. It's not unfair to assume, we're absorbing most of that right now.

Okay that's fair. Thank you.

Again that's not a specific comment, I'm just talking generally about the cost, you've to spend up front relative to these businesses.

Sure, okay that's very helpful. Thank you. And then last one from me, you're obviously digesting a couple of substantial acquisitions done in the last 12 months. I'm curious to know what kind of synergies you've identified within the segments and how the sales of those businesses are tracking particularly Canton. I mean it sounds like you said organic growth in engineered products was 13% I don't know if I misread you. But that would imply a pretty substantial contribution from Canton in the quarter.

Ed Crawford. Number one aerospace initiative is clearly still in place. We've started singling two conference call if not further back that we like that segment, we like the margins in this segment. Canton Forge is a company we have been looking at continually for the last four, five years. We were fortunate enough to finally acquire this company. It is an excellent company and deeply in the aerospace business, so as we're talking about that and we're talking about the future. I want to comment on Matt's thoughts. We were talking about the 10 speed transmission and how important that was and our $25 million investment and I would ask everyone to be patient for two or three years, so when finally came home the same thing is happening here. We're spending a tremendous amount of dollars for the future investment starting plants, you won't see it yet, but that's at 2019. So we're still very active in this area. The acquisitions are difficult at levels we like to require them, but we're optimistic. There's sure lot of traffic and lot of availability.

Yes, I might add on it. In my opening comments I tried to remind people our framework for acquisitions. I talked about buying profitable companies. I talked about complementing our current business. I talked about them having strong historic reputations in their business and having a very sticky and loyal customer base. This one ticks every box and we are really not only pleased with their performance in terms of meeting the goals that were stated at the time of the acquisition, but I would say more importantly that team and the leadership that's coming out of that business has rippled beyond Canton Drop Forge. So both qualitatively and quantitatively this has been a good investment for us.

Okay, I really appreciate all the time. Thank you. I'll get back in queue.

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

So assembly components, I wanted to start with that Matthew. I think in portion of your comments you discussed the drag from investment. I think you said it's feasible to think $10 million to $15 million of cost drag right now. I'm assuming that's annualized, but you had mentioned - inflation and mix. And I'm wondering if you could kind of quantify the margin impact maybe from three of those, those three pockets.

I'm going to let Pat address the second part of that question. But let me make sure that I was understood in my comment about the $10 million to $15 million. All I was doing was suggesting that, we're chasing $100 million plus sales initiative by 2020 out of these facilities and I'm just suggesting at our corporate rate that would be $10 million to $15 million a year so. I just want to be specific, I wasn't making any specific guidance or estimate of the current cost. I was just trying to remind everyone, building new facilities isn't easy either economically or from a people standpoint and once again, I'd be remising that thanking our people who are flying all over the world to make this happen, so it's a very toll and I was just using that as a swag to sort of remind people that the cost are significant.

Ed, let me answer your question around the mix which we saw in the quarter. In that segment there's really two primary businesses. It was our aluminum business and then there is the fuel and rubber products business. Our aluminum business showed, we had a great revenue quarter. Their margins are slightly lower than what we see in the fuel related product. So part of that brought our overall segment margin down a little bit despite their fantastic performance. The second part of the mix question, we had end of life programs in certain of our plants on the fuel side which has been replaced and that business that is replacing is currently being launched in different plants, which are coming through a lower margins at this time. We fully expect to get back to where we view as the normal margin. So really that's the mix side of that segment and then finally on the commodity price increases where we saw, as you've seen in the marketplace aluminum prices were increasing throughout the quarter. Now we do get recovery from that price increase that typically is a lag to when it actually is being realized from our vendors. So that was part of the drag on the margin and then the other was the impact which wasn't as significant on the tariffs. So hopefully that covers your question.

I'm curios if I could dive in a bit further and say, no there's been some long-term initiatives for all three of your businesses in targets. I'm curios if you would be willing to talk about maybe where the normalized earnings power or our EBIT margin would be within assembly components to kind of give us a sense once we're past of these costs, where do you think business [technical difficulty].

Well I'll jump in on that briefly and say, we believe that the initiatives that we have discussed in assembly components will be powerful to revenue line and accretive to margins. But with so much capacity coming online, I personally wouldn't feel comfortable in making a specific expectation.

Okay and off that $100 million that you talked about from the new facilities, are you recognizing any of that today?

Very small amount.

You mentioned about tariffs and you said you're watching this situation closely as obviously we all are, I'm curious that what are the one signs that you're looking from a company that will accept your business the most that, that you're kind of focused or as you're in watching.

Our biggest issue right now candidly has been less regarding the tariffs that have been targeting China and more regarding the tariffs that have been targeting Europe and Canada. There are significant - and the President is signing correct when he says that the United States is unable to make many special types of steels these days, specialty steels or products related to steel. Some of the products we buy in the metals industries are very narrow. There are very few suppliers of aluminum these days particular prime aluminum. So he's targeted some industries that the supply chain in the western world is very, very consolidated and very, very difficult to meet the quality standards of our customers. So certainly China we're watching, but the negotiations around NAFTA, the negotiations with the EU around steel or perhaps even more fronted mind today.

[Indiscernible]. I won't speak again until you do.

No, that's right. I want to shed some light on all the uncertainties around the tariffs and other issues that faces our company and faces all particularly manufacturing companies, American manufacturing companies and all. Yes, there are some unknowns there and there will continue unknowns as America tries to restructure the kind of the way the business is done fairly. On the other hand, we are benefactors now of higher revenue. The economy is strong, the country is feeling good about itself and that gives us more absorption in the plant, so there's a positive side to this, it's all about negative. Yes, there's been some inconvenience. Yes, we're working our way through it. But start with the fact, that we have plants running at higher absorption rates and that is in a very important part of the other side of the argument okay or concerns. So are we willing to trade? Of course we log, did not have the issue about the tariffs and have with the higher revenues. But we have the higher revenues, the plants are doing better, their higher margins and that's the offset. So we can't sit here and operate the company worrying about the obstacles that we see are going to see, we just have to face them and address them. So we're not panicked here and each one of these things are almost isolated. We'll see it how it goes between countries. Keep in mind, the volume, the majority, the high majority of volume in our facilities and in China are for China. We're not exporting to out of China, we haven't been, we're not there for that. We went there to be part of the family growing Chinese manufacturing companies. So there's some strategy around this that in our way kind of offsets not that we knew anything about the tariffs then, but this works in our favor. So we might be less affected because we are there for that market, not the ship out of that country.

We believe proudly in our strategy our diversifications. At times it helps, at times it hurts and in this particular case. This has been the benefit of being a diverse global manufacturer.

Makes sense. I'm curios when I look at the [indiscernible] just out of curiosity obviously ran a little higher this quarter. I'm curios how much embedded in that, that is one-time in nature versus the carryover cost, the remainder of the year. I guess I'm just specifically referring to maybe any catch up. You're obviously ahead of targets for the year, I'm assuming there was a clearly catch up and then also anything associated with maybe with the retirement, that you can kind of help me out with those thoughts and what normalized SG&A number might look like.

Ed this is Pat. So I would there were not any significant one-time SG&A hits in the quarter. I think when you look at our SG&A in whole dollars as well as percentage of sales. We did show an increase in the percentage margin as a result of the acquired companies SG&A percentage to sales. In addition, we had some increases in professional fees, but I would not say that was one-time in nature. But on a normalized basis, we do expect those SG&A at least SG&A percentage of sales to come down from its current percentage in the quarter and I think you'll see that over the course of the year.

Got it. And then, one of the focus one last question if I could, you brought out Canton and you talked me about how it's - that you're pleased with that, that what you're seeing in the [technical difficulty] as I'm wondering, if it was, the benefits are, it sounds like it's ahead of expectations. So if I think about what's driving that above expectation growth, is it the capital you gave the business is cross selling between the two businesses that you have in that market, synergies on a cost perspective, is it just the market that you've already kind of mentioned as well. Just trying to a sense as to what that's giving you so much of a surprise here?

Well number one it wasn't a surprise. Okay. This is an acquisition and as you know we've done between 80 and 90 acquisitions here. So we're not surprised at all, this is a great company. We try to buy it twice before, we finally ended up acquiring it. We're deeply into forging business. We like the forging business. We got crop and other investments, so we're not surprised we're all about the company. In fact, a lot of - it's created a lot of excitement in the forging business, in the niche and we're talking about this. We're talking about forging prices, forging at a certain size or level. And we plan to be a dominant force, a dominant force in this small-to-medium sized forging in North America and we've moved in that position we're going to continue to go there because we like the business and we like the margins and we like the customer base.

Okay, thanks very much.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please state your question.

It's really good to hear the focus on the longer term investment themes. Can you give us some more detail on how you see the growth in electric vehicles? How much revenue exposure you have to that sub-segment right now?

Sure. I'm happy to add some color on that. This is Matt. I think that what it's important to understand when we talk about the migration to a fully electric vehicle is that includes a lot of different stages. I mean obviously all of our cars for years have been eletrified at some levels. When we talk about propulsion, the fastest growing segment of the electrification process globally are hybrid engines and it's not even close Steve. I mean it's not even close. And they foresee that to be the case for a long time. So there is a symbiotic relationship in our opinion and I think it's pretty commonly understood between the improvements in the internal combustion engine and advancements in battery technology. Most people globally want their cake and eat it to right now. So I think that there's a lot of dinner table conversations and water cooler conversations about Tesla, but I think that when you look at the roadmap at the EOEs, while the noise is all on the fully electric vehicle. There is real meat in the production numbers coming particularly in China. But other places as well on the hybrids and I think that, what's important in that is a couple of our, so when you think about our automotive business. Let's think about where we're positioned, light-weighting, right? Which is roughly related to maybe half of our little bit less half of our automotive revenue whether it be aluminum casting or self-piercing fasteners, these kinds of components are going to be ubiquitous regardless of the propulsion system. So that's a good place to be. I think when we think about the direct injection technology. Yes of course that's focused on internal combustion engine, but once again that is symbiotic for a long time to come. Maybe in my kid's lifetime they won't have an internal combustion engine at all. But the real [indiscernible] roadmap right now at the EOE's is how to make the current engine smaller, less expensive and more productive. So I think that's I think where direct injection technology has a very bright future and while not just, we but number of people in our industry as well are building new facilities because they just can't move fast enough, people like Bosch, people like Hitachi, not just people like Park-Ohio. And then lastly I think our expansion and thoughtfulness around extruded plastic and particularly rubber hose is very exciting. The example I would use, as we sort of grew up and that teen [ph] grew up in the fuel business which is a corrosive material. So they are very savvy at understanding how to make extruded hose that doesn't permeate and that has become increasingly important not just for the regulatory environment globally, but has also become important as you think about the electrification of the car. So and most notably, how batteries and such things are going to cooled. So that maybe gives you a sense, I view our portfolio right now which I just mentioned 95% plus of our portfolio in automotive has a place in that transition from internal combustion to electric propulsion.

Steve, let me take another shot at this. You set it with the words growth and where growth is and where we see it. As we've stated, that we consider ourselves diversified international company and I think Matthew's comments earlier in the presentation about how it's working for us and is working very well to be a diverse right industrial company, with worldwide reach. If it continues to move in the direction is every single year, the percentage of sales outside North America grow. And we're committed to the concept that we want to be in the future, where there is population growth. We think growth is not going to be stagnant, but I don't think there is going to be great growth of people and consumer consumption in America or in the Euro zone. So we're interested in China, we're interested in India, we're interested in Mexico and ultimately Indonesia. So when you want to talk about growth and creating value in the company. We've already made these investments to go to these locations and this is really why we're excited about this commitment that we've made to one of the biggest markets and that is China and another incredible market, a growth market of people and consumers and people who buy things, called Mexico. So when we think of growth, we think of where we're growing. We already started to go there, this is not - we're not developing now. We've been talking it about this for two or three years. I continually pointed out in the past, we're going to be a $2 billion and we're giving everyone the roadmap, we've said we're going to go there, we're getting there and as the momentum and the markets [indiscernible] just in our growth markets in the future.

I think it makes a lot of sense. As you've added that capacity, internationally are you finding new customers for fuel injection or extruded products or is this more about growing with existing customers?

It's about both. But I think that you would have predicted the latter, right? I mean we like to go, I've talked about our international expansions before and said we'd like to go with a purchase order which is really great, when you can do it. I think that we have that we're building out additionally capacity to absorb additional customers particularly Chinese national companies. We're bringing some technology we believe will benefit those Chinese car companies that are trying to come up the quality curve and the regulatory curve faster than their installed base can take them. So no, absolutely we see this as being an advancement for us, which used to go China with a purchase order from a Western Company and now I think we feel that we've got the technology and the capacity to sell to local companies.

Got it. And then on the other investment theme. I hear you like the forging business, you've been in crop [ph] for a long time. Can you be more specific about how you leverage the capacity at crop [ph] and Canton into domestic or global opportunities, is this taking about share from existing customers, is it about rolling up the space, how do you just - what's the strategic view?

Steve, this is Pat. I'll take that. When we look at acquiring Canton Drop Forge, we recognized that there was a lot of opportunity between the two businesses not only from a cost standpoint, but also from a sales and marketing standpoint. Many of our customers have unique requirements relative to their forging especially in the Aerospace industries and you have to be certified to be able to supply those forgings. So there is not many people in the supply chain that can do that and do it at the quality standards that are required. We have two such companies now that are able to do that, so our customer base is looking for us and maybe because they didn't have enough confidence in their other suppliers long-term, but with us they know that we're long-term investors, we're going to be around for a long, long time and they've given us opportunity just to quote new business. So I think, this is a case where one plus one equals there and we're starting to see the benefit of that.

As you think about the future of the franchise, can you serve international markets from North America or do you expect to look for international forged acquisitions to grow that globally?

Those parts are large parts typically you don't see them shipping across the water, but if there's an opportunity for us to acquire a company that has a strategic aspect to it, to these two businesses we would definitely look at it. But most of what we're doing today, although we do ship some of the product overseas, most of the opportunities we're seeing will be in North America.

Got it. Last question from me, when I look back at engineered margins in 2012 through 2014 and ran mid-teens and I know that was during the shale plays [ph], but even with the pretty strong recovery over the past six quarters. We're still running about half that, has there been a structural change to the profitability of the segment or is mix that much different to prevent you from getting the margin profile that you had before.

Let me take a shot at that, first Steve. This is Matt. I would be remiss by not commenting that the - those days related to the buildup and capacity around pipe for shale, those days where China was still aggressively building out their capacity. There's still no capacity and so forth, those were heavy days. I mean they were very significant for many parts of our capital equipment business. So I think that clearly was a unique time period. Having said, I would also tell you that so they are [indiscernible] some fundamental shifts I would say for example, as we've grown the business and invested more in the hardening side versus the melting side. We've seen the average order size come down. So I think there has been a little bit of a compression on the average order size, it doesn't mean we don't do wonderfully well on those orders. There has been some of the froth came off some of that expansion that you just discussed and I just mentioned. So no, I would say that it would be fair to assume that those would be difficult to replicate. Having said that, our aftermarket business has grown and sustained the profitability it had even in the best of days and our equipment business is more diverse and healthier both from a product standpoint and a geographic standpoint. So it's a better business and we will, as we look for synergies and improve our manufacturing processes, after what was a pretty difficult few years there and cutting back in a lot of key personnel, we're going to see margin enhancement, so we're going to do better and you're starting to see signs of that. But make no mistake, even at a compressed margin this is a better business today than it was then. We were narrowed product portfolio that just happened hit at all the right spots and we've reinvested that money to diversify the business.

Understood, thank you.

Thank you. Our next question comes from Matthew Paige with Gabelli & Company. Please state your question.

I first just wanted to clarify Pat's comments on the ramp up, that the assembly components facilities. Can you just help us understand that the cadence of investments? Does that end at the end of the year?

So you're referring to the comments I made around the mix, the end of life programs?

No, the three new facilities that are ramping up now and you mentioned that 2019 was full production I thought.

Right. Well I mentioned that in 2019 will be at revenue run rate of $100 million. So that's in three facilities; two in China and one in Mexico. All of those facilities are in early stages of either production or getting ready for production. So we expect to steady ramp up over the next two years in each of those three plants.

Okay and is that, $100 million run rate incremental business or that otherwise have come from other facility?

The majority of that $100 million is incremental.

Okay and Matt, finally congratulations on being elected Chairman and CEO. I know you've been with the company for quite some time, but now sitting in the CEO's chair I wanted to give you the opportunity to talk about anything you wish was in the Park-Ohio portfolio or maybe any product lines or businesses that you no longer see as core to the company.

Thank you for that opportunity. Asking me careful, my old boss is in the room, so I got to be careful. No I appreciate it. And let me - I made some comments at the shareholder meeting and I would repeat that. I've been lucky to be one of the architects of what we have today and many of the strategies that I'm discussing. So I think that I'm very proud of the business portfolio we have, so I would not expect to see any dramatic change. So I think that first of all, there's a saying it's - the doctor's first do no harm. So I think that, what largely you can expect from me that maybe subtly different than the past, is not so much a significant strategic shift. Maybe a little more focused I think on the quality of earnings. We are a growth oriented company, but I think we've grown so quickly we have the opportunity to focus on the bottom, equally as much as the top and I think there's some opportunities. And I think while we'll continue to be a company focused on acquisitions I think you're seeing us focus on this call little bit more on the organic growth opportunities. We've got a good portfolio of businesses, are all these businesses able to grow 6%, 7% a year no, no some little more cyclical. But I think we do have some products and you're hearing us highlight them a little bit more today than you have in the past, on the opportunities where of our product portfolio that with some investment and with some vision that we can really see push the needle on the organic growth side.

All right, well thank you for taking my questions. Best of luck.

[Operator Instructions] our next question comes from Marco Rodriguez with Stonegate Capital Markets. Please state your question.

I was wondering if you can talk a little bit more about supply technologies, the growth you're kind of seeing it from an organic standpoint. Are you seeing most of that growth coming from existing customers and their business is just doing better or is there a combination of you taking share?

I'll take the third option, all of the above. Pat, can discuss in details as he did during his comments. No I think we were seeing, the supply chain business is the first to react when it's our most diverse OEM end market business and it's the first to react in a robust economy, so you're seeing the real-time benefits of an expanding economy. When you see economy grew 4.2% or whatever the supply it's already in supply tax numbers, so they will benefit quickly when there is strong manufacturing environment, which there is now. So I think number one, I think that is a very clear and very robust at this point. I do think we are focused back to my point a moment ago on leveraging these ideas into adjacent markets and the services they provide regarding lowering total cost for customers. So we're succeeding in MRO, which was zero a couple of years ago. We're succeeding in aerospace which was zero a couple years ago; we're succeeding in reserve initiating our mid-market the business. So yes that sure is coming from somewhere. So I think when we say with pride that signed up 40 new customers in the quarter we're proud of that number. Now some of them were meaningful to the revenue line, but they're going to be. Pat, what are your thoughts?

No that's.

I agree Matt. Supply Technology is the most diversified of our businesses covering so many different end markets and we've highlighted only a couple of them. But our penetration in each of these markets continues to grow and having a list of 40 new customers in the quarter is really a substantial achievement by our business. So I agree with Matt's comments.

Understood. Also the kind of clarification question here on the three new plants that you have ramping up to a run rate of $100 million in fiscal 2019. I'm assuming that's second half type event and would those three plants be operating at maximum capacity if you will.

Well number, we talked about $100 million run rate. We're not talking about $100 million. When we give projections, we talk about run rate. This is a company, a company that are starting up, it will reach a run rate sometime in 2019 of approximately that number. It might run into the following year, but we're talking about run rates. We're not talking about actual dollars of sales. So we're saying it is on its way, the series of plants set back, starting to plants. Again run rate not actual hard sales. If you want to talk about hard sales, you're going to have to move out into 2020, if you want to think about hard sales or somewhere in that timeline.

Marco, let me just clarify, I agree. 2020 is when we're going to see those run rates. Maybe we'll get some of it in 2019 like Eddie mentioned, but 2020 is where we're going to see that revenue run rate coming.

And if that revenue rate, are the plants operating at full capacity or they still underutilized?

This is Matt. As I mentioned we built some extra capacity because we believe that we will be successful with customers that we haven't even talked to yet.

Got you, understood. And last very quick question, kind of high level and not to kind of beat a dead horse here on the tariff aspects. But just wondering if maybe you can talk a little bit about I guess on worst case scenario from NAFTA and Europe. Just kind of help us understand a little bit as far as how quickly you can kind of move through the conversations with your customers and supply chains to kind of manage the situations should that some will come to pass.

There is a lot of discrete trade negotiations ongoing. So is there a specific one you'd like to me comment on.

You mentioned in your response to one of your other questions on tariffs that, NAFTA and the EU are more front and center to you versus the issues going on China. So I was wondering if you can maybe comment on that in terms of how quickly, if that really goes south, how quickly you can sort of manage that situation and what you will be doing.

I'll let Pat comment real quick, but we're managing that - that is ongoing. So it's not as though we're sort just sort of sitting back and taking the hits. So we view this as important to be addressed immediately and there's - as I mentioned earlier discussions going on both side to the supply chain. Both with the customer and with the vendors.

Marco, the tariff situation as Matt mentioned is fluid, but in both in our businesses it is somewhat isolated, when you talk about aluminum or you talk about steel. And so we're working with our supply chain as well as our customers to mitigate the efforts and those discussions are ongoing. As soon as we realize that there is an impact one of our vendors, we are all over with our customer to try to resolve the situation because the last thing the customer wants, is to disrupt it's supply chain and approved supplier of a specialty raw material so obviously they're working closely with us on all fronts, on this matter.

And to be clear as mentioned in both of our comments, we have built in, into our second half forecast the recognition that we're not going to get that we may not get every dollar. So but that doesn't mean that we're not going to try.

Thanks a lot, appreciate your time.

Thank you. Our next question comes from Mario Gabelli with Gabelli and Company. Please state your question.

Matt and Ed, delighted that we make the transition map and good comments and a lot of the questions were answered. I've been in this for 25 years, you've had a lot of air pockets in the past. You've overcome them and you guys have a knowledge of the factory like most companies that I've visited, you're excelling at that, so thank you.

Thank you Mario. We appreciate you getting on the call.

Yes I don't want to get anymore - I've got some questions but not in the weeds, but for strategic. Thanks.

Thanks Mario. Thank you for your support.

Thank you. Our next question comes from John Baun [ph]. Please go ahead with your question.

Guys, I certainly would echo Mario's comments right there. Great seeing the transition and to echo, Eddie you have a great future both behind and ahead of you. I just got a quick housekeeping question. Maybe this is directed to Pat. The tax rate you get in right now, it's like 30% baked in, 5 percentage points on that coming down to 25%. What at about? I don't know - $0.25, $0.30 EPS. What's the goal, can you chart out getting that to 25% all in worldwide and is that process of delevering, what do you got to do to try to shave that tax rate down? Thanks.

John, thanks. We are - our 2018 effective tax rate we're estimating at 30%. Are there ways in which we can bring that tax rate more in line with what we're seeing in the US? It would take some efforts but it's a complex project and we're going to work towards continuing to reduce that effective tax rate. So right now that's really all I want to comment on, it's on our radar and we're going to continue to try to move that rate down.

And John nothing, the strength in the US economy benefits us here. I mean that's one of the limitations is the mix of foreign versus domestic earning. So to the extent we're doing a little bit than we thought which I think is fair Pat on the blended tax rate. What we stand a benefit from a strengthening US economy and earnings mix?

Well again with the leverage you guys get built in on the growth that you got built in looking at the bottom line, we're picking away there 1, 2 percentage points but keep up the half-life, the bottom line is going to work. So it's been a tremendous run. I'm looking forward to the next 20 years, thanks guys. Okay have a great day.

Thanks John. Thanks for your long-term support. We appreciate it.

Thank you. There are no further questions at this time. I will turn it back to management for closing remarks. Thanks.

Great. Well thank you very much for the excellent questions today and letting us talk about things that we're most excited about, which is the future. We look forward to interacting again on next quarter's call. Thank you very much.

Thank you. This concludes today's conference. All parties can disconnect and have a great day.