Good morning. Welcome to the Park-Ohio Second Quarter 2019 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. [Operator instructions] 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 2018 10-K, which was filed on March 5, 2019, with the SEC. Additionally, the company may discuss adjusted EPS and EBITDA as defined. Adjusted EPS 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 of EBITDA as defined, please refer to the company's recent earnings release. I would now like to turn the conference over to Mr. Matthew Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Thank you, very much and good morning, and welcome to Park-Ohio's second-quarter 2019 earnings call or performance call, I guess, I should call it. These are very exciting times at Park-Ohio. We're launching record levels of new business. We just are commissioning our nearly $20 million fully automated forging press in Arkansas. We are improving performance at three new facilities around the world. We completed an outstanding strategic acquisition in the second quarter, and we achieved results in line with our expectations, which are near record results. The best part is we did this while facing some adversity. Labor shortages continue in some markets; inflation, tariff and otherwise; a significant slowdown in the auto space in China; and some volatility in end-market US demand and European demand. There should be no surprise to anyone on this call. Park-Ohio is a diverse company, both in terms of products and markets. We continue to focus vigilantly, as always, on expenses, and we are a very agile company. I often get the question about last year and how robust our 17% growth was last year. And I remind people, at any given time, part of the business is up. And part of the business is down. So in response to that and being as agile, as always, we continue to make adjustments both in terms of facilities. We endured some plant closures during the first half of the year. And also in terms of adjusting our workforce appropriately, we will continue to do that to meet our performance. We have reaffirmed our guidance for the second half of the year, certainly, since our last call, macroeconomic risks have increased, but we're happy to bet on ourselves and the diversity of the business and our ability to be agile relative to cost and footprint. With that, I'll turn it over to Pat Fogarty.

Thank you, Matt. Overall, the results for the second quarter were positive and continue to demonstrate the strength of our diversified operations, products and geographic locations. Key highlights in the second quarter included the completion of the acquisition of Erie Press Systems, which will add tremendous value to our engineered products segment. We expect Erie's results in the second half of 2019 to be accretive to our earnings. Also in the second quarter, we continue the start-up of over 50 new auto related programs in our Assembly Components segment, which will add over $125 million of revenues annually, most of which is incremental to today's business. The production ramp up has begun in most of our facilities, both in North America and Asia and will positively impact our second half results. In addition, we completed two plant closures in this segment, and we'll see the benefit from these actions throughout the remainder of 2019 and beyond. And finally, our engineered products segment results reflect continued strong demand for our induction equipment, our aftermarket parts and services and our forging products used by our aerospace and rail customers. Turning now to the consolidated results for the quarter, sales were $415 million, compared to $432 million last year. The sales decline year-over-year was a result of weaker demand in Asia and Europe in certain key end markets in both our supply technologies and assembly components segments. These declines more than offset strong top-line performance in our engineered products segment, where the business climate continued to be strong. Consolidated gross margins in the second quarter were 15.9%, compared to 16.9% a year ago. The margin decrease was due primarily to $1.7 million of onetime plant closing costs in our assembly components segment. Excluding those charges, gross margin in the quarter would have been…

Great, thank you very much, Pat. Before turning over to questions, I want to echo some of the Pat's final comments and his team throughout the presentation. There obviously is some incremental headline risk given what's going on in the global economy, but our focus for the rest of this year will be on strong cash flows and, secondly, continuing focus on quality of earnings, around new business, the utilization of the new investments that we've made, pricing strategy and when necessary cost structure. So that's where our focus is for the rest of the year. We certainly hope to grow and have the diversity of what we're doing impact our overall results. But regardless, our focus is on strong cash flows and margin enhancement. With that, I'll turn it over to questions.

[Operator instructions] Our first question is from the former Chairman and CEO of Park-Ohio and the current US Ambassador to Ireland, Ambassador Edward Crawford. Please proceed, Mr. Ambassador.

Well, good morning. Great quarter, gentlemen. Would you comment further on Park-Ohio's diversified international development plans and its long-term effect on the company?

Sure. First of all, thank you for coming in. Mr. Ambassador, it's good to hear from you this morning. And we certainly appreciate it though. Thank you for the call. Well, I'll begin by reminding everyone that our global footprint and our diversity by product and end market has existed for 15 to 20 years. So this strategy is not new to Park-Ohio. Having said that, the backbone of the current strategy is around innovation, particularly in some of the auto investments we've made in China related to the electrification transfer of technology and the fuel emissions regulatory environment in particular, as well as some of the investments that we're leveraging over the acquisitions we've made in Europe and in the UK. Regarding the aerospace group, so not only do we think we've got diversification in terms of place and product, but it's also the part of our portfolio that is based on our most innovative products. I don't know if you have anything to add?

Yes, I would add by saying when you look at the business that we're launching, that covers many different plants, many different products, many different customers, not only the large OEMs, but also the Tier 1 customers around the world. So that particular segment is seeing a very large increase in diversification as we grow the business.

Well, thank you very much and keep up the good work. Thank you.

Great, thank you too. Good luck over there.

Our next question is from Chris Van Horn with B. Riley FBR.

Good morning guys, thank you for taking my call.

Good morning, Chris.

Good morning, Chris.

I guess, as I look at the guidance, you have a little bit of a range here. I'm just curious of what the puts and takes are for the guide? And is it dependent on some end-market factors? Or there's some things operationally that gets you within that range?

Chris, I can't answer that question without starting with the fact that the range, while maybe considerable on an EPS basis is relatively small on a nominal dollar EBIT or EBITDA amount. So we feel like, at this point, we're projecting a fairly narrow set of dollar earnings with the limited share count it manifests itself in a little bit of a bigger gap on the EPS side. So I want to – it's always a bit of a trick bag and I applaud Pat and his team to be able to convert that to such a narrow EPS band. Having said that, as I've mentioned, no, we are certainly focused on and need a reasonably steady industrial market, but having said that, our business plan this year was predicated more on finishing the year-strong relative to some of our investments and the beginning to see the impact on some of our margin strategies. So I think that what we need to do is we need to continue to make headway and execution as it relates to the new investment launches, and some of the pricing strategies in response to some of the inflation we've seen in the marketplace. That's how we're going to make our numbers. Certainly, we're somewhat reliant on a well-balanced revenue approach. But as I mentioned in the past, our diversity suggests that we'll get there, absent a recession or a significant sell-off in the industrial marketplace. So this is a balanced approach. I mean, we do need some help from the economy to stay steady globally, but we've taken our hits on that side. And our business plan now is built on executing the investments we've made over the last 18 to 24 months.

Okay, got it. That's fair. When I look at your end market exposure, obviously, you have some automotive. But it sounds like you're winning some new business there that might be a secular theme. Many people are kind of opining that the truck cycle might be peaking here and just curious, your view on those markets? And how maybe Park-Ohio is a little bit more resilient than others because you have been able to see growth in those areas, despite the commentary around these cycles kind of peaking?

Yeah. No, that's a fair comment. I think that there is certainly – the truck market from a revenue standpoint has been a strong participant in our revenue growth, both last year and continues to be a contributor this year. So watching that cycle, weaken a touch, or is expected. It's a very cyclical market. I mean, people said that the auto is cyclical. Well, if you've been in Class 8 trucks. That's a real cycle. So we're familiar with it, and we'll manage it. From an earnings perspective, it does tend to be as a segment, profitable, but dilutive to our overall margins. So you've heard us talk a lot about mix. To the extent that the mix turns, and we see some recovery in some higher-margin markets and lose some revenue and some lower margin that could be bad revenue, good for margin. We'll see. The punch line is truck is still a minority of the revenue at supply technologies let alone the overall business. So it could be a headwind. But relative to its margin profile and the size of it relative to all Park-Ohio, I think it's manageable.

Yeah. Chris, the only comment I would add is that, we talked about diversification. Well, the truck market is no different, not only do we service the Class 8 market, but we're also servicing the Class 5 to 7 market, which tends to run a different – a little bit different cycle than the Class 8 market.

Okay, got it. And then last one for me. You've always done a really good job at finding and kind of integrating some of these acquisitions. I just was still a bit curious, how Erie Press came up? And are they exposed to any specific end market versus another and how you see the pipeline for future acquisitions.

I'll take the first part, and then Pat, who many of you know, does corporate development, as well as being our Chief Financial Officer, can comment on the current environment. Erie Press is a business that we have been familiar with at Park-Ohio, through our equipment business, and in particular, our Ajax at Chambersburg, hammer and mechanical forging press business for a long, long time. We have been desirous of adding that to our portfolio for a long, long time. Now not only do I think it builds out the portfolio of our ability to make now mechanical presses as well as hydraulic and other kinds of presses, but it also allows us to leverage some of the machining capabilities, some of the aftermarket business, et cetera. So this is a classic example of a deal that we've been tracking at the business unit level for a long time that our team has been desirous of getting – bringing into the fold for many, many years. And we formed a relationship with the family that owned it, wonderful people. They're still active in the business. This is exactly a Park-Ohio kind of deal. So we're very excited about it, and it fits perfectly.

Yeah, Chris, I would add that Erie, despite the similarities and the strategic reasons for doing that deal, their end customer market is primarily aerospace. And that adds a different market to our forging press business and tremendous opportunity to expand our presence in that market. So for all of those reasons, it was a really great deal for us. Relative to the acquisitions in the marketplace, we continue to see deals regularly. Our focus is on looking at those that are strategic and growth companies. So the deal flow continues to be good. I see valuations tracking downward a little bit. And as banks tighten up in their lending, we'll see multiples start to come into the range where we really look to take on opportunities.

Okay, got it. Thank you so much for your time this morning.

Thank you.

Our next question is from Steve Barger with KeyBanc Capital Markets.

Hi, good morning guys.

Good morning.

Good morning.

Can you talk more specifically about the profitability of the $125 million in incremental revenue? What is it about those programs that bring so much leverage? Did you get better pricing or is this a function of utilization or absorption, just trying to understand your confidence here.

Yes, I would choose not to talk about a particular margin profile across 50 platforms. But I think what I can comment on is, it is rare, in fact, I think unprecedented in Park-Ohio's history to be launching over an 18 month period in essentially four different locations at once. So I think it is fair to assume that we have seen dilution to our earnings as we launch those businesses. Having said that, simply making them profitable and starting to absorb some of the expenses and the overhead there will be – will contribute meaningfully to our performance. So we don't need those business to get to peak margins. I think that our unprecedented investment in these four facilities – we'll begin to see margin enhancement, just based on that, as we see the operating leverage there. Having said that, we are investing in parts of our business that traditionally have been accretive to our overall margin, so I think, I wouldn't expect anything different going forward.

That's good to hear. And the reason I ask is, if I look at the first half '19 operating margin versus the first half of '18, it's up 10 basis points. And historically, Park-Ohio's had low incremental-contribution margin on modest revenue increases, which I think is what we're looking at in the back half, plus or minus, as I think about the puts and takes of launches, mix versus end-market challenges.

And we have been investing and spending the money in these other businesses. We have seen lower incremental margin improvement off revenue dollars. I think it's a little unfair to say that in a truly negative sense, because I think, you have the weigh-down of these businesses who are investing for the future, combined with a Supply Technology business that particularly in 2018 did very well, has a wonderful financial model, as you know, and yet tends to have a lower margin profile. So I hear what you're saying, it's completely accurate, but I also want to make sure people understand that margin accretion, with that mix, and those business launches, probably undersells what's actually being accomplished.

That's great detail. For Supply Technology, specifically, are you seeing customers scale back on production broadly? And is your operating cash flow guidance anticipating a big working cap benefit from destocking in the second half?

Yes, Steve, this is Pat. I think normal cyclicality of our business annually will show you that we generally generate a lot of cash in the second half of the year. Clearly, some of that is the improvement in our working capital metrics, not only in Supply Technologies, but in every one of our businesses. At the end of June, we saw customers stretching out their payment longer than normal. And so we do expect the $50 million to $60 million of operating cash flow to –we're going to benefit from reduced working capital requirements.

Got it, well and just to go back to the question specifically, Supply Tech is obviously tied into a lot of production plans for customers. Are you seeing – just as we see macro decelerate, is that translating into more cautious customer production plans, broadly speaking, going into the back half?

Yes. I think we're seeing a little more volatility in our end-markets than we have over the last year. And so there is some of that. I don't think it's from a – it's not material. But we are seeing more swings in volatility with our production requirements of our customers.

Okay. For your rail-oriented businesses, can you talk about what you're seeing in terms of track and infrastructure versus railcar components versus locomotive products?

Steve, that's a good question. I wouldn't be prepared and I don't know the Pat is, to break that business apart. But all of it really resides in our engineered products segment and then inside of that in our forging group. We have seen robust activity in our forged rail part of our business. I wouldn't be prepared to comment right now on what's driving that? If it's just rail builds or track maintenance. I'm not sure at this moment.

Okay. And just last one for me. Any update on China auto for both international nameplates and the domestic producers there. Has that market softness slowed down industry consolidation talk or accelerated it?

Well, clearly, I think it was June 1, I believe, was the deadline for noncompliant cars to be sold. So I mean it would be hard to articulate how disastrous the first part of this year was for selling parts to players who had noncompliant inventories, which they were slashing, I think, up to 50% and 60% and 70% off brand-new cars. So that was a disaster. No question about it. And it really slowed down the launch of 1 of our facilities, in particular, I think probably set it back a year, for lack of a better word, from a timing perspective from our expectations. Having said that, I think that I can really only talk about our experience, Steve, we are a – most of the Chinese national OEMs as well – SAIC included as well as the multinationals are absolutely getting the message that they need to invest in products that meet the regulatory elements at this point. So we continue to see real energy in the quoting environment. That will be certainly helpful to us as we get late into this year and early next year, whether that precipitates some consolidation or not, is a great question because, certainly, the smaller Chinese national companies are going to have to find a way to meet these compliance standards. So you would think that would precipitate some consolidation, but I don't know that we're privy to that at this point.

So the emissions and mileage requirements are not in name only, they're really pressing the OEMs to hit these targets?

Yes, I can tell you, if you look – everyone talks about sales rates, production rates for people like Shanghai GM, I think we're off 50% or 60% for the first part of this year, because they were just trying to blow through inventory for their products that were noncompliant.

Got it, thanks for the time.

Thank you.

Our next question is from Marco Rodriguez with Stonegate Capital Markets.

Good morning and thank you for taking my questions.

Good morning, Marco.

Good morning.

I was wondering if you can talk a little bit more about Supply Technologies, the component side. Obviously, you guys called out some weakness in the semiconductor market and consumer electronics, especially in Asia. Can you maybe provide a little more detail there on the CE side? Are there specific areas that you're seeing weakness in like maybe handset manufacturers? And then on the semi side, there is that just a broad semiconductor weakness that you're seeing? Or are there specific areas within the semiconductor industry that you're seeing that weakness?

Yeah, Marco, I – yeah, that would be – I mean, don't get me wrong, consumer electronics and semi are important segments, albeit on a relatively smaller side in Supply Technologies. And they have been impactful to our performance. Having said that, with our customers, who are sort of the large contract manufacturers or large tool suppliers, I'm not sure, I would be prepared to understand what's driving their underlying performance.

Got you, and then switching over to Engineered Products, you guys had mentioned that you're seeing a lot of strength there, some good movement going forward based on just sort of a global reinvestment cycle in the metals market. Can you maybe talk a little bit more about that? What you're kind of seeing there in terms of expectations going forward? And maybe where you might be inside that cycle?

Yes. It's interesting because we have a tendency, I think, to look at commodity prices as a driver to those businesses. And I think over the mid- to long-term commodity prices are very relevant to investment in that business and trends for our business as well. Having said that, I will – what you're seeing, I think, relative to investment, particularly, let's focus on the steel industry for a moment, is you continue to see massive investments in the steel sector to upgrade their assets whether it be to improve their assets in terms of their ability to make different types of alloys, or high-strength steels, which I think is sort of the wave of the future, if you will. So I think that is a – or specialty metals. I think that's sort of a cycle that's going on. Secondarily, they are very focused on margin. I think they realize they're going to have to make money at lower pricing over the long term. So investing in productivity, I think, is important as well. I don't have these numbers at my fingertips, but I think, for example, US steel might have spent double last year than the year before for CapEx, as they sort of upgrade their facilities and make them more productive and invest in the right places in the market. So I think despite the pricing in the steel market, which is still on a historical basis, okay. I think that they need to modernize their facilities, and I think we can be part of that, whether it be on the aftermarket basis or on the new equipment side. I think the same is true a little bit on the oil and gas side. I think that depending on where you are in that cycle – or where in that supply chain, there's still a pretty heavy rig count. So while natural gas prices, in particular, and oil are off considerably, and we've seen a little bit of that impact to parts of our business, there's still a significant rig count out there. So supporting that can still be reasonably steady in the macroeconomic sense.

That's very helpful. And last question, just coming back on the acquisition landscape for you guys and sort of current debt levels. Some of the metrics have kind of crept up a little bit here over the last year. So just can you maybe update us in terms of your comfort levels on debt, where you think you kind of max out, if you will, where you feel uncomfortable in terms of adding on additional debt?

So this is Matt, and then I'll let – I mean Pat is in a better position to answer. But let me just comment generally. We have a stated goal of trying to get our leverage ratio under three times. We think that is the right place to be in this part of the cycle to achieve the flexibility we want in going forward. So I do think you've seen in 2019, a subtle shift toward a focus on that deleveraging. That doesn't mean we'll skip great acquisitions. It just means that we are – that is a strategy, sort of a named strategy, if you will, for 2019. And we sort of reflect on that one more screening deals. But I also want to point out something else. Don't get me wrong. We focus on leverage. We certainly think about it. But where the rubber hits the road really is coverage. We've paid a lot of money, obviously, to create a structure that includes a significant amount of – or two thirds of our debt essentially is fixed, non-amortizing six-and-change in terms of coupon and not due until 2027. So we have liquidity that's well in excess of $200 million. We have coverage, something on the order of $150 million worth of EBITDA against $30 million, $35 million worth of interest. So we're covering in that metric over four times. I am just commenting to you how we think about the ability. You can't be agnostic – you can't focus on leverage and be agnostic to rates. I mean, we've set up a structure that we believe gives us maximum flexibility. So we are interested in decreasing leverage, it is a focus of our process, but it's a much more intricate thought process relative to structure and relative to rates and coverage that we consider. So we will continue to look at deals. We'll continue to do good deals and strategic deals. But having said all that, yes, we are interested in paying down some debt as well.

I echo Matt's comments, Marco. We've stated what our goal is to get our net debt leverage below and right around three. We've indicated we plan to do one strategic deal this year. We're not going to pass up on a very strategic deal. But we also view getting our leverage down as a key metric for us going forward.

Got it, great commentary, I appreciate it. Thanks for your time guys.

Thank you.

Our next question is from John Baum, Private Investor.

Good morning guys. Congratulations on a good quarter and nice guidance in the face of maybe a softening industrial environment.

Thanks, John.

Thanks, appreciate it.

It was nice to hear from our number one shareholder and former CEO as the first caller in, so I hope we can get over there –

We agree, it was a little bit of a surprise, but it was great.

Hopefully, we can get a little Irish business out of there too, so let's get a plug in. I hope he's still listening there. Is it possible to – your guidance was especially, shall I say, admirable with respect to what we see with Chinese tariffs. I think you've said before that you're in Asia to sell to Asia – or in China to sell to China. So is it possible to quantify the tariff impact or is it not really material because you're not in China necessarily to export back to the US, but basically to sell into China? Is there any thoughts on that and perhaps on a hard Brexit too if we talk about foreign exchange? Good ahead.

I'll start. I'm lucky, I get to start and Pat gets to clean up, he has the harder job. Let me just start by saying I mean, Supply Technologies, in particular – I don't want to undersell the attention this gets in our automotive group, because it matters there, too, but to your point, we tend to buy and sell in the region we're in. Supply Technologies is particularly exposed here because, they do a lot of consolidating, and they do a lot of business either directly or indirectly in Asia and in some cases, in China. So inflation is – and to be honest with you, it's been a lot of work for them, because sometimes a supplier to us that may supply a relatively large number can negotiate a price increase and then we've got to distribute that over 1,000 parts to 25 customers. It can be – the timing can be a more – a bit interesting. Having said that, our team is all over it, this is not – nothing is new to them. They understand the impact. It has been, I think, as we mentioned on prior calls, since the beginning of this tariff issue, which began a year ago, March, I think, or a year ago, April, we have paid considerable attention, tracked it and it is a multimillion dollar issue, there's no doubt about it. But we are focused on this on the supply chain side, when necessary on the pricing side and I just want to assure you that we are – while it has impacted our margins negatively. This is not something that we lack an understanding or a strategy around.

John, my comments are similar to Matt's in that, in Supply Technologies, they import very little directly from China, alright. But there is some amount and the tariffs on those imported goods are really what we're talking about. And we're fighting hard to resource and get proper pricing from our customers on a daily basis, and that's occurring. Relative to our business in China, our strategy is that we are in China for China. And we are not importing product back to the States from China. So the currency drop that we have seen recently there should not have a material effect on our business. Our business in China within Supply Technology is mostly done in US dollars. In our start-up plants in our assembly components business that are in local currency would have a translation effect that's not positive. But right now, those plants are not material to our overall business. So I wouldn't expect any significant hits from that.

Let's see, some granular questions for Patrick, overall question back to Matt, and I'll finish up. So just looking at the cash taxes on a go-forward basis, I know it's complicated with various jurisdictions, but I don't know, are we looking at 25% to 30% on that and I'll forward that one to Pat. And Matt I'll let you finish up with, are you still reaffirming $2 billion in sales and a 10% EBITDA margin coming up in the future? Thanks guys.

Thanks John. Cash taxes paid through six months, we paid $5.3 million. I would expect that to range from $15 million to $20 million for the year, which is consistent with pretty much where we were a year ago.

Thank you.

Thanks John.

We have reached the end of the question-and-answer session. I will now turn the call over to Mr. Matthew Crawford, for closing remarks.

We're not ignorant of some of the volatility and some of the risks that are going on geopolitically and otherwise, but we think we've got the team, and we think we've got the products and the leadership team, in particular I should say, to get through this and get through it positively. I also want to recognize we have an increasingly a complex business from a financial perspective and today, we have Mike Volchko, our former Corporate Controller and Rob Pierce, our VP of Corporate Finance, and I just want to compliment both of them on the work they do to get the books closed, to get them straight and help us look good and smart on these calls because they're doing most the heavy lifting. So thank you to both of you, who are in the room with me, and we appreciate your time today. Thank you very much. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.