Good morning, and welcome to the Park-Ohio First Quarter 2020 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 2019 10-K, which was filed on March 12, 2020 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 EPS to adjusted EPS and for a reconciliation of net income attributable to ParkOhio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I will now like to turn the conference over to Mr. Matthew Crawford, Chairman, CEO and President. Please proceed, Mr. Crawford.

Good afternoon, and thank you for joining our first quarter 2020 call. I want to begin by thanking our entire ParkOhio team for helping navigate this incredibly difficult time. I'm aware of the personal sacrifices that all of us are making, and I'm thankful for the commitment that our team has made to keep everyone safe and support our customers. I also want to express our best wishes for a speedy recovery to the small handful of COVID-19 cases throughout our global workforce. Pat Fogarty is here with me as well, and I will have him cover in detail the first quarter in a moment. But before I do, I want to discuss a few things about our approach to managing COVID-19 and the challenging business environment we expect to encounter at least through the remainder of 2020. Despite a robust start to the year, our focus during the second half of March turned very quickly to managing the rapidly changing business and health environment. First, since almost all of our businesses were deemed essential under local law, we worked quickly to manage health and safety. Many work from home, but many also work throughout our facilities. Our pandemic task force and business leadership moved quickly to implement safety protocol, including social distancing, temperature monitoring, appropriate use of PPE, barriers and hygiene practices. Second, we urgently worked to understand the changing needs of our customers and to respond with changes to our cost structure. Unfortunately, that included a significant reduction in headcount, salary levels and hours worked. We continue to also focus intensely on operating costs and have meaningfully reduced all discretionary spending. We accomplished these needed changes while still fulfilling our customer requirements and making sure that we have not lost our ability to participate in the upside as…

Thank you, Matt, and good afternoon. Our first quarter results reflected the initial impact of the COVID-19 global pandemic. Each of our business segments were affected during the quarter as government regulations force many customer facilities to shut down their operations. During the month of March, weakening demand in most of our end markets began and intensified throughout the month of April and into the early part of May. Although many of our operations remain open and ship product to essential businesses, our automotive operations were idled throughout the month of March, and for most of our plants, remain shut down. Our Asian and European operations, which were affected by the pandemic earlier than in North America, have started back up, although at low levels of production. We expect most of our locations that have been shut down will be back in production at some time during the month of May. We have put in place the necessary safety protocols to provide a safe work environment for our employees during the start-up phase at each of our locations around the world. In response to the current business environment, we have taken significant actions to reduce operating costs, aggressively manage working capital and eliminate noncritical capital expenditures. Our cost reduction actions included personnel layoffs affecting approximately 2,700 employees, which represents approximately 40% of our global workforce. Salary reductions across all locations took place, including executive compensation and reduced board fees and the reduction in various discretionary spend items like travel and production and office-related supplies. We also announced the suspension of the quarterly dividend paid to our shareholders in our current press release. As we have done in prior recessionary periods, we have focused our attention on converting working capital to cash, including reducing inventory levels and increasing customer collection efforts.…

Great. Thank you, Pat. We'll now open the line up for questions.

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

Hi Matthew, Pat. Good afternoon. Hope everyone's doing safe. Hope you're safe and sound. The -- I want to talk about, if I could, the margin progression maybe throughout the year as you move through. And I'm trying to look at the cost takeout and maybe an improving mix later in the year, albeit volumes are relatively low. So I'm just trying to get a feel for kind of how you look at the margin progression quarter-to-quarter. Thanks.

Yes. And I'll let Pat -- give Pat a minute to think while I say that modeling this environment is extremely difficult. We do have a number of businesses that have relatively high fixed costs. So determining and modeling margin enhancement, particularly as we look at some of the businesses being below 50% utilization is quite a challenge. So our contribution rates in these businesses range probably from about 20% to 35% or 40%. So I think we've got opportunity but modeling the revenue recovery at this point is extremely difficult. Is that -- would you like to add, Pat?

Yes, that's fair. And I would say that as we look into the second quarter, that obviously is the most difficult quarter to be able to estimate because volumes are jumping around, especially in the tail end of this month and into June. And it's very unclear as to where the automotive production levels will be towards the end of the second quarter. As we get into Q3 and, hopefully, we get to a more normalized level, clearly, we should start to see margin improvement based on actions that we have taken. We hope and believe that we will emerge a much more profitable and a better quality of earnings. And so I guess, if I were -- if you were to model, I would just suggest that Q2 will be the trough and things will be improving after that.

Got it. Maybe if I could ask it in another way, too. If I were to look at the -- and quantify the cost takeout that's already been implemented, whether it's on an hourly basis or in a progression of SG&A on the salary side. Can you talk about is that to maintain at the existing level of business? Or did you kind of get ahead of it and maybe the incrementals or the decrementals will change slightly in a more favorable way? I'm just trying to think that through, if I could.

Of the $120 million in annualized cost reductions, about $10 million would be considered SG&A-related on an annualized basis. The rest would be primarily variable costs that have been taken out as a result of the lower volumes.

Got it. Okay. If I look at the comments that you made around, say, the recovery in China, you've mentioned in the press release about the order book in the second half of May and kind of the pace that you anticipate through June. I'm wondering if you could, if there's any way to quantify that order book down or up on a year-over-year basis or maybe a book-to-bill kind of related to Q2, Q1. Just kind of get a sense as to the framework there that we're working from.

Yes. I'll begin just by giving some context to that question. One of the problems of that is we have obviously COVID-related softness. Some of our underlying markets came into COVID being a little softer. We saw some weakness in rail. We saw some weak weakness in class 8 truck. So honestly, I think that it's going to be really hard, other than I think we recognize the explicit impact of plant shutdowns on our April and May results. I think forecasting a recovery at this point, particularly given some of the underlying softness in the markets I discussed and even more notably, perhaps, oil and gas, is very difficult.

Sure. And the final one for me. When I think about Engineered Products, one of the things that surprised me in the release was kind of how fast that, and I would have thought kind of big longer order projects, bigger capital equipment, that might have held in a little bit longer. Maybe that fits kind of that already saw some weakness as it relates to energy. First, could you quantify that? And secondly, I guess maybe you can talk about the direct or indirect impact energy has or maybe the percent of sales, indirect or direct, that energy has for Engineered Products.

Yes. I mean we traditionally feel as though our equipment business is a later cycle business. And that has tended to be true. It was true in '08, '09. I think that it tended to be true recently as well. I think that the shock here to the oil patch as well as COVID maybe has resulted in maybe more extreme actions than we're accustomed to in terms of deferrals, in some cases, cancellations early in an order process. But I think that this has acted out in a slightly different way. And of course, not knowing how long this will hang over some of our key end markets. We've tried to be thoughtful in terms of managing key customer relationships. So the dynamics, I think, have been a little bit different and perhaps a little bit more aggressive than we've seen in a typical recessionary period vis-à-vis cancellations and deferrals of receipt, which may be impacted the business a bit more quickly. And I want to leave, before I let Pat sort of clean up on the oil and gas piece, I want to say, what has continued to conduct itself quite well, even surprisingly, given the significance of the plant shutdowns globally, is the aftermarket business. And we don't talk about that enough, and that continued to perform at expectations.

Yes. Ed, I'll add relative to the capital equipment business. Our locations in Italy and Spain were shut down during the month of March. And so as our business, when you think of the revenues are recognized under a percentage of completion basis, their production was down. So therefore, they were not unable to recognize any revenue. So that affected the quarter. And then other locations, for example, our Erie Press acquisition, our operation in Pennsylvania. Pennsylvania shut down, and they were deemed nonessential. And so they weren't getting the percentage of completion revenue in the quarter. So that affected that segment. The forged and machined products group, the oil and gas market was down as we entered into the year, and it really dried up in the first quarter, and that affected our Canton Drop Forge plant, which is a very profitable plant. So those are the things that really affected Engineered Products. As Matt mentioned, our aftermarket business was right in line with our beginning of the year forecast and margins were as good as they have been historically. So we're happy with the performance there.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

So I hear you on the operating loss for 2Q, and we can all take our best guess on revenue, but just thinking about this from a decremental standpoint, it was around 20% in 1Q. When you think about your offsetting cost cuts, can you limit 2Q to that 20%? Or is that worse because of under-absorption?

I think that's going to be determined based on where volume shake out in the month of June. So it's difficult for me to answer that right now. Although our revenues, when you think about our Assembly Components segment, so much in many of our plants were shut down for more than half of the quarter. So there'll be no absorption during that 1.5 months. So I would expect it to be worse from that standpoint.

And definitely, you would expect the biggest sequential revenue decline to be in assembly?

Absolutely.

Okay. Maybe on a somewhat more positive note. Matt, can you talk about process improvements, where you're taking actions first? Any comments on specific programs where you see opportunities?

Yes. I think that, I appreciate the question, first of all. We have not lost our focus on some of the pillars of our improvement of our, our quality of earnings improvement process. So the, our ability to focus and continue to challenge price across the board, both strategically and in terms of underperforming accounts, hasn't lost a step. In fact, arguably, we have a little more time to focus on it. So we are extremely engaged at that level and would expect to use this opportunity. While it's hard to renegotiate contracts per se during this period, we certainly have the opportunity, I think, to continue to identify strategies around key accounts. So that's -- in key products and services. So that's number one. Number two, Pat mentioned briefly about consolidation. We talked about 1 plant closure. But we're challenging our footprint very meaningfully, recognizing that it could be a while until we're at prior revenue levels. So I think he just sort of tipped his hand to one of the things that's going on, but we have a variety of locations throughout the business that are what I'll call under review, whether in terms of the right size footprint or the right location. I don't think conclusions have been made at this point. But I think the point is this is a wonderful opportunity to see how our business can operate with a lower overhead rates. I also want to highlight that while I think that the business of procurement and sourcing and the sort of operating side of the business was diminished visibly and meaningfully during April, the engineering community didn't take time off. So while many new programs might have been pushed out or new business is lagging, work on the engineering side and the new business side continue to be robust as well. And then lastly, we have scalably cut back CapEx. So -- but that does not mean -- sub $20 million is still a lot of money, Steve, and you were around a few years ago when our total CapEx was in that range. So we are continuing to prioritize high return -- or excuse me, quick return projects. And those include opportunities to reduce variances, whether they be scrap-related or labor-related. And I applaud our team that's out there saying, it was really tough to focus on these things when your plant was running at 90%, 95%, 100% of capacity and we have plants that are shut down, where we've got teams working to improve the operations and impact those variances from the moment we reopened. So some of that money, we continue to spend, both in terms of CapEx and personnel expense through the cycle. So I've given you a flavor of 4 areas that, in my opinion, continued relatively untouched through the process.

Yes. No, it's very good commentary. Thanks. And I did -- it caught my ear when you said that some end markets have met or exceeded expectations. Any commentary on that? And as you've looked at April trends, anything that looks like it's coming out of it sooner than some of the others?

Yes. I don't want to -- I felt strongly to say that because I want to promote the concept of our diverse end markets that we have. I don't think we saw a material amount of people overperform or expect that in the near term. But we're honored to be supplying, for example, manufacturers of respirators, for example. So we've got some great customers that are doing well, but I want to give that in the context of diversity rather than to suggest it's going to be a material cost variance.

Yes. One last for me. We've all been, I think, operating under this theory that if auto production slowed, that some of the fuel efficiency and lightweighting programs will be down less than overall production, or that automakers would use the slowdown to accelerate some of those initiatives. Are we -- is that actually happening? Are you seeing that in China, or are the automakers talking about wanting to pursue that more quickly using this lower volume environment?

Yes. As I referenced, I think that the engineering community, particularly in the automotive space, continues to evolve and continues to focus on those issues and others that you've mentioned. Unfortunately, I think the overarching, and I think the technology road maps, so that's a positive. I think the technology road maps are being impacted. How? We don't know. And what we do know is the primary automotive investors, the OEs, are cash strapped. So it seems clear those technology road maps will be impacted. How much and for how long? We really don't know, Steve. In a more short-term and meaningful way, what we've seen is the push out of new programs. So in some ways, to the extent we're on the incumbent program, we can benefit from that. But by and large, that is a challenge for us. As you know, we have been winning programs, growing our business, investing capital. So by and large, the short-term impact of this experience will be to really delay some of the exciting things that were going on in the business. Generally, I hear those programs are pushed out 3 or 4 months, not a year. But unfortunately, that, I think, was something that we were excited to see and how they launch and at what rates will be interesting to watch. But I don't know if that answers the question. I think there's a lot going on in the engineering community, whether or not some of these more interesting technology road maps can make sense, I don't know. What I do know is they will continue to want fuel efficiency. They will continue to want lighter vehicles. So I still feel, strategically, we're positioned in the right place. But the long-term impact is uncertain to me.

Your next question comes from the line of Marco Rodriguez with Stonegate Capital Markets.

I was wondering if maybe you could provide maybe a little bit more some color on the magnitude of declines you guys saw maybe in March as comparison to January and February. And if maybe if you could comment a little bit by segment what you saw in April as well?

Sure, Marco. Let's start with the segment that has affected the most, and that's the Assembly Components segment, which is primarily an automotive-driven segment. By mid-March, most of our plants were idled. In April, they were completely idled. In May, they've been, we expect them to be idled through mid-month, unless things get pushed out by the OEMs throughout the month of May. So as I look into the second quarter, 2/3 of the quarter is going to be idled based on our estimates. Maybe a little less. So that's how the Assembly Components segment gets affected. In Supply Technologies, the North American customers we're seeing a decline in demand. A lot of their businesses are deemed essential, so they will be operating. We're back up in operation in China. And so some of the businesses outside of North America seem to be back in production and performing well. In the last segment, Engineered Products, we expect pretty much the same type of quarter in the second quarter as in Q1, pending what happens with our aftermarket business. We saw that as a strong part of the quarter. We're seeing some slowdown in that area. But hopefully, that will pick up as we get through the month of March.

And then if you can just kind of remind us here on the Assembly Components side, can you walk through maybe the mechanics between when the OE start to open up their facilities, how quickly would they be putting orders to you and then your quick turnaround? Or are there substantial lead times that kind of need to be put forth to you guys well in advance, if you will?

Marco, this is Matt. So let's just sort of back up and understand the scale of the issue. Sort of you may have noticed already, the OEs have talked about, have pushed back potential opening of some of the assembly facilities a couple of times. I think now resonating around a May 18th date. I think there will be releases at some of the component and engine plants in advance of that. But I think you cannot overstate the risk to the pace at which they will reopen these plants, meaning 1 shift, not three. I can't think you can overstate the risk to some of the supply chain. You may be following some of the concerns over the supply chain out of Mexico, which would affect every major OEM and every major platform. Mexico has had some different restrictions around the work environment, and that has put at risk some of that supply chain. So I do think we'll begin to see releases here in the near term, but the, we can assume, while the base may be next to nothing during April, I think we can assume that the incremental improvements will be baby steps.

Your next question comes from the line of George Melas with MKH Management.

Sobering conference call, and thanks for all the information. I have a question regarding your liquidity. You guys talked about being cash flow from operations positive in the second quarter. And also, I think you mentioned being free cash flow positive in the second quarter, but also you said your liquidity would decline a little bit. So maybe you can sort of take those various points and maybe try to elaborate on that.

Sure. I'll take that, George. Sure. So our current bank, our main bank facility is an asset-based loan. And so depending on the collateral base each month really dictates what our availability is. And so my comments that our liquidity would drop in the second quarter is primarily because we expect our receivables to drop in the current month as well as inventory, which will give us less availability during the quarter. To the extent that our cash flow is below the drop in collateral, we would expect our availability to go down. And so that's really what is meant by that. And when we talk about our availability and the decline that we expect to see, it's probably in terms of percentages. It's probably a 15% to 20% decline from where it is at the end of the first quarter, which will tell you that we have significant availability to manage through this crisis that we're seeing.

George, I want to -- I can't miss the opportunity to make sure that you take our comments in context. You're right, this experience and our commitment to you to give us the best picture we know or can see is a bit sobering. I think you used a good word there. But I want to tell you, our lack of visibility doesn't mean that we are not optimistic about what we've done in our future. We are -- it's impossible for us to really appreciate how these incentives and how the injection of capital that will continue for the next couple of months, that the government has put into the system, will impact our business. We have seen anecdotal evidence where we benefited from weaker competitors, not material at this point, but we've seen some of those opportunities. And we continue to believe that we have made the right investments over the last 18 months to propel our strategic advantage forward. So I just -- I want to make sure that you understand that we -- our inability to see out over 3 or 4 quarters is prohibiting us from really talking too much about that, and unfortunately, focusing on the current period. But we're confident we're going to get through this, and we're confident we will be there to appreciate the improvements in the economy that maybe it will be later this year, maybe it will be in 2021, but it's coming.

Okay. Yes. That's very helpful. And I think all the work you guys have done to reinforce management to -- in the last 1.5 years and to drive improvements in the businesses was a huge, great preparation for what you're facing now. Maybe just a question on the working capital, and I don't know, Pat, if there's any way to estimate that. But is there a way to estimate how much you expect working capital to be positive in the June quarter as you draw down -- as ARs and inventory come down?

Yes. Well, clearly, we expect our working capital to decline during this period of time. I think in general, our total company working capital represents about 25% of revenue. So I think that's probably a good barometer to use. As revenues fall, we should expect to see that percentage come out of working capital.

Okay. Great. Thank you.

Our next question is a follow-up from Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Sorry about that. I guess one of the benefits of working from home, I lost the connection there to the call. So, I apologize.

No problem.

Yes. I was wondering if I could circle back around, and I'm not sure if I missed this question after I lost connection, but on liquidity. In your prepared remarks, you obviously talked about the aggressive stance you're going to be taking to working capital and reduction of CapEx. Can you maybe talk a little bit more about how those liquidations there on the working capital side impacts your borrowing base on your revolver?

So our main revolver, Marco, has availability at the end of March of $170 million of the $180 million total company availability. That availability is based on the collateral behind it, which is our domestic receivables and inventory. So as that asset base declines, we would expect availability to decline. As we pay down and generate cash flow and pay down that debt, we would expect our availability to jump back up. So what we're seeing in the second quarter, clearly, as working capital falls, we're going to generate cash flow, we're going to pay down debt, but we also recognize that the collateral behind it is going to drop as well. We don't, as we've mentioned, we have significant availability. We expect significant availability throughout this period of time based on where we see our collateral base falling.

Got it. And last one for me. Understandable, all the defensive actions you're taking. And one of the call, one of the questions earlier was discussing a potential offensive move that you guys can come out of this situation in a much more leaner and operational-efficient company. But I was wondering if you can maybe talk about any other additional offensive opportunities you might see, whether that be M&A-related or anything of that nature?

Yes. No, I appreciate that question, Marco, because we have always come out of recessionary periods a stronger company. And most of the time, we've laid the seeds, sometimes, most often through acquisition for our next significant leg up. So we are clearly keen on doing that again, given the opportunity. And I think that the work that we've done on the balance sheet, we believe, will give us the flexibility, given the right opportunity. I will tell you, the way the M&A environment is working right now is, I think, given the shock to the system, it is clear that troubled suppliers that we compete with in our varied businesses, largely, will continue to be, I think, propped up generally by their banking institutions. I think that there is an intense interest on behalf of the banking community and the government to make sure that at least during this time period, that people have an opportunity to try and succeed and emerge from it. So we don't, we probably won't see those opportunities until later this summer, where people, I think, are asked to develop a forecast and talk about what their business looks like in more of an extended period of lower volume. But you're right, that is part of our playbook and will continue to be. And it sure would be nice to find something, and I hope we do. But at this point, the deal flow, I think you'll find from, you'll hear from everyone is pretty slow because this happens so quickly and people are trying to work through it with their bank's support and their stakeholders' support.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Matthew Crawford for closing remarks.

Great. Well, thank you very much for joining us today. I hope we gave you the best information we have. Perhaps it wasn't the best of news, but we are very optimistic about the future and feel as though we're doing the right things every day to make sure that we're going to have a better business. So thank you for your support.

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