Good morning, and welcome to the Park-Ohio Third Quarter 2020 Results Conference Call. [Operator Instructions] 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 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 Park-Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release. I would now like to turn the conference over to Mr. Matthew Crawford, Chairman, CEO and President. Please proceed, Mr. Crawford.

Thank you, and good morning. Welcome to Park-Ohio's Third Quarter 2020 Conference Call -- Earnings Conference Call. I'm joined here this morning with Pat Fogarty, our Chief Financial Officer. Park-Ohio experienced a significant recovery in many of our end markets during the third quarter, resulting in an almost 50% increase in revenue, so increase in revenue sequentially from the second quarter. Additionally, we achieved approximately 85% as compared to 2019, a market improvement. Of equal importance is that we continue our journey to become a more focused business, which will enjoy improved operating leverage and higher overall quality of earnings. To support this initiative, we continue to improve our long-term competitiveness by identifying and executing on actions to meaningfully improve operating metrics and lower our cost structure. Additionally, we are actively investing in products and services, which will be the backbone of a future business with higher returns on invested capital and growth throughout the business cycle. Notably, we accomplished these goals while generating $23 million of operating cash and an increased discipline around CapEx, both critical components in our efforts to operate at a lower level of financial leverage. While these achievements are notable, and I want to thank the entire team for their contributions during what continues to be a difficult time, we are doubling our efforts as we go into 2021 and expect to see ongoing momentum from these initiatives from 2021 and beyond. In particular, I want to highlight the efforts of supply technology. Despite dealing with ongoing headwinds in a number of their key markets, they achieved operating margins, which were above pre-COVID 2019 levels. This work is a testament to the ongoing strategic effort within supply technologies to deliver superior customer service within an environment of continuous improvement while also introducing new higher-margin products and services. As a company, we're cautiously optimistic about the remainder of the year and the beginning of 2021. We're particularly excited about some of the new, and in some cases, delayed-new business, which will help begin our track back to normalized business levels. We believe we will start the year with the strongest foundation in recent memory. But above all, we endeavor to keep our teammates healthy and provide a safer workplace as possible. With that, I'll turn it over to Pat Fogarty.

Thanks, Matt. During the third quarter, we saw a strong recovery in many of our end markets. Third quarter consolidated revenues increased 49% sequentially versus the second quarter and represented approximately 85% of prior year sales. Sales in certain end markets such as automotive, semiconductor, medical, lawn and garden and power sports were in excess of 90% of prior year levels. And on the flip side, other end markets such as Commercial and Military Aerospace, Oil and Gas and Rail have been slower to recover, which is notably reflected in the results of our Engineered Products segment. In addition to the solid revenue recovery during the quarter, we began to see the benefits of the permanent cost reductions implemented in each of our business segments. This was evident in our Supply Technologies segment, where margins were up 130 basis points compared to last year's third quarter margins on lower sales levels. We are confident that the actions taken in our business segments will continue to result in margin expansion as sales volumes continue to recover. Our efforts to aggressively manage both working capital and capital spending yielded $23 million of operating cash flow and $18 million of free cash flow in the quarter. We utilized our free cash flow generated during the quarter to repay $18 million of outstanding indebtedness. We ended the quarter with total liquidity of $243 million, an increase of 23% since June 30. The improvement in our liquidity is the result of improved business conditions and the efforts to manage working capital and cash flow since the beginning of the pandemic. Turning now to the detailed results for the quarter. Consolidated sales were $340 million compared to $228 million in the second quarter and $403 million last year. Throughout the quarter, we saw a solid recovery…

Great. Thank you, Pat. I will now open the line for questions.

[Operator Instructions] Our first question comes from the line of Steve Barger with KeyBanc Capital Markets.

Matt, 2020 has obviously been a tough year, but you and the team made quick decisions to deal with it. Can you just give some more specifics on key initiatives going forward to reduce cyclicality and increase returns that we could start to see in 2021? Just maybe flush out some of the big opportunities.

Okay. Yes. No, it's been a very difficult year, and it has been extremely volatile and continues to be extremely volatile from an end-market perspective. So we're enjoying our diversity. We always believe in that and feel it's an asset relative to cash flows and end markets. But we need to control what we can control right now. We recognize that while we feel as though our business is stabilizing from a revenue perspective, there continues to be risk, ongoing risk. So our initiatives around, as Pat mentioned, footprint and operating expenses are really across the board. We have touched probably 12 to 14 different locations with either full closures, plant full closures or a shrinkage of footprint. So that's been significant. We've also made significant investments in automation and done things that I think, again, we'll focus on areas of the business that we're not operating efficiently, whether they be specific plants or operations or manufacturing cells. So those literally are in the dozens and dozens of things that are being worked on. So it's a fairly detailed, comprehensive plan that allows us to do the things that are a little more obvious in a downturn than when you're focused more exclusively on growth. I think in terms of what we're focusing on in terms of evolving where we're investing in terms of products and ideas, there's -- again, I mean, our business, Steve, as you know, is in the trenches. Supply Technologies has a number of initiatives going on. But I would certainly mention a couple, one of them would be the precision machine components initiative which is really moving away from some of the fastener product we've historically been involved in, which sells for pennies into really more significant complex items, which often sell for dollars, if…

That is a lot. I mean, that's a lot of really exciting initiatives. So when you talk about having touched the 12 to 15 locations for permanent closures or footprint reduction, those will be permanent changes without -- that don't necessarily impact your ability to ship product or your throughput. So -- or I guess, said another way, you're shrinking your cost footprint, but without limiting your ability to drive higher revenue, which -- is that a factor in the higher returns?

Yes. Steve, this is Pat. Absolutely. Each of the locations that are affected before decisions were made either downsize or close, we ensure that any business, customer-related business was able to be serviced by the locations that are benefiting from that downsizing or closing. So clearly, this is an effort to reduce our fixed cost footprint to allow for improved absorptions at each of the locations when revenues return. And I would say it touches each of our segments, probably more so in our Assembly Components segment. But we consolidated an awful lot in our Supply Tech segment as well.

Steve, I just want to point out something that you didn't ask, but I'm going to say. You know culturally, our DNA is to have a very decentralized, agile management team. We really believe in authority at the local level. So to be clear, we're not straying from that philosophy. What we are doing is pushing people to identify critical synergies in the business that you tend to see when the tide goes out. So I don't see any real shrinkage on the customer side, I just see better, lower-cost operations.

Yes, that sounds great. As you think about the revenue stabilization, and I understand there's still a lot of end market uncertainty, especially going into 4Q. But do you expect to see sequential revenue improvement again in 4Q? Any chance it could even get to flat against the fairly easy, down 6.5% comp in 4Q '19?

Yes. Steve, I would just echo Matt's comments that our end markets are stabilizing. We saw in the third quarter some ramp up in certain end markets that we don't expect to reoccur in the fourth quarter. We have other markets that we're seeing signs of a better recovery, in particular, Heavy Duty Truck. So it's difficult right now to see how December is going to shake out with the seasonal softness that we normally see. But I think the key here is that our end markets are stable, and we should be in good position as we head into next year to increase our revenues.

Got it. And I'll ask 1 more and get back in line. So just a similar question on 4Q margin. Any unusual cost items or mix headwinds that you expect this quarter? Or will some of these cost actions you've taken allow you to keep decremental to kind of that mid- to high-teen plus or minus in 4Q?

I would expect similar margins in Q4 as we head into next year. So much of the restructuring is completed. We do have some things that are being worked on and will continue into the first quarter of next year. But overall, our margins, we expect to continue to be enhanced as we head into 2021.

Steve, I would also offer that we -- what we've seen in stabilization has largely come from Supply Tech on the margin side. So that, I think, is wonderful because that's high return on invested capital. But from an overall margin profile, Engineered Products has historically been our highest-margin business. So I think we're excited, and we're making all the right moves to be in the things we can control to improve margins in that business, but a little bit of help there in 2021 should be amplified through our consolidated financial statements. And I would also tell you one more thing on the margins. While automotive volumes have returned, getting people to show up to work, we have hundreds of jobs open in any given day. Getting people to shop to work and work efficiently is a huge ongoing challenge. So our opportunity there on the -- is on the margin side more than the revenue side. And we're getting our arms around it more every day.

Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities.

On the last earnings call, you talked about $100 million-plus of new sales that was delayed into fiscal '21. Could you please provide an update here? Maybe what type of cadence should we be expecting from a ramp perspective?

Yes. As I mentioned, Sarkis, we expected some delays in the launches that were happening. That business has not been lost. We continue to believe that our growth in Assembly Components will exceed $100 million incrementally. The question is really around timing. So I would expect we'll begin to see that incremental revenue increase throughout 2021 as volumes begin to ramp up in each of the product lines that we're talking about.

Understood. And would the margins be any different from an incremental basis relative to maybe what we're seeing now, given all the improvements you're making from a cost structure perspective?

Yes. Absolutely. The reason for much of the reduction in our fixed cost footprint is to allow for the improved absorption in the plants that are getting this new volume. So we would expect margin expansion as a result of the new revenues coming in.

Sarkis, I would add that this is -- we talked a lot early last year about the opening of 2 new facilities in our Automotive segment, one in Mexico and one in China, in Chengdu, and also Changshu as well, where it was a little bit of an older facility. But the punchline is, a lot of this business is earmarked for those locations. So not only do I think it's at good pricing margins, I think there's tremendous opportunity to achieve lower operating costs and more absorptions in some facilities that are still under-absorbed.

That's helpful. And in which of your segments are you seeing any potential new wins today? And maybe if you can talk to some activity in end markets or maybe specific customers?

Yes. I would characterize new business development as having been fairly stable through COVID. I don't know that we're seeing significant transitional business. I think a lot of people are -- a lot of OEs are -- COVID is providing them less instinct or less desire to take great risk on the supply base. But I do think that we continue to see a strong interest at Supply Tech relative to our mid-market initiatives and our MRO work. Again, more in the $500,000 range customer rather than the $5 million customer. I think on Automotive, that design work and the energy around new product development continues to be robust. So our quoting funnel there in China or the U.S. and a little bit in Europe is still at probably all-time highs. So we continue to see tremendous activity on the new product development side in Automotive. Again, I think not something necessarily that would be transitional over the next 12 to 18 months. But solid performance that will allow us to get sort of the mid-range growth as an underpinning to our success.

Great. And one last one for me. Maybe if you can talk about the target level of free cash flow generation, kind of considering the potential working capital build, assuming volumes recover, and maybe help us understand how you're managing that?

Sure. As we head into 2021, the diversification of our business and the margin expansion that we expect is going to be a very positive impact to our free cash flow. So I think when you look at historic levels of free cash flow right around $50 million annually is definitely a level that we should be able to exceed moving forward. Managing working capital is -- depending on the business segment and where we see the growth is always challenging, and being able to manage our inventory levels is the key. And we do a pretty good job of that. And we've seen that during the course of the third quarter, and we expect to continue to see that in the fourth quarter. Fourth quarter free cash flow, I mentioned that we're going to see about $10 million of Capex. That should translate to a free cash flow number, somewhere around $10 million in the fourth quarter. Hopefully, that's helpful to you, Sarkis.

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

I was wondering if, Matt, you can kind of circle back around on some of the strategic initiatives here that you discussed in the first question. And more specifically in terms of how that's going to drive kind of a higher ROIC-type business for you guys. I was wondering if maybe you can kind of help frame or define any sort of levels of returns on invested capital that you might be targeting. Any sort of timelines that might be helpful for us to kind of think how you're pushing this initiative through to the company?

Yes, sure. First of all, these are all active initiatives. Everything I've laid out, maybe with some of the -- with the exception of some of the IR -- some of the R&D, our industrial equipment group, these are all revenue-producing strategies today. Each of them leverage operations, engineering expertise and leadership teams we have on board today. So these initiatives are not pie in the sky, so to speak. They're -- we're actively marketing and engaged in these strategies. So as we move into 2021, all of these should achieve 25% to 30% return on invested capital a minimum based on the incremental opportunities that reside within these teams. So we're very excited about it. I don't know that independently any of them are transitional in terms of 2021 revenue and returns, but every one of them is significantly incremental from a profitability and a return standpoint. Pat, would you agree with that?

Definitely. Yes, I think in each of the businesses, as we've invested in, whether it's growth capital or in value driver initiatives, we expect a very high internal rate of return on each of those investments.

Got it. Understood. And then, Matt, I appreciate you coming out and answering the question in terms of the structure of the business, how it's not really -- not sort of changing despite the fact that a lot of these initiatives sound like they're from the essential versus a decentralized-type structure. But wondering if maybe you can kind of hit on the structural or incentives you might have in place or thinking of putting into place to kind of drive these initiatives at the decentralized structure you have?

Yes. That's a great question, and something we spend a lot of time thinking about. We continue to, again, I mean, value and give a lot of responsibility and authority at the local level. But we have initiated a reorganization around a key leadership team at the operating level that is intended to streamline the way that we work with the different operating units. And I think that they're doing a great job in pushing forward and collaborating with us on additional investment, if that's necessary, or more often just an approval process to move forward on advancing some of these structural items. So it's a real partnership. And again, we're not adding, per se, a layer of management. I think we're just streamlining the decision-making process to access some of these best practices out there and to secure the type of investment necessary to get these value drivers, which, in most cases, are 6-month paybacks.

Got it. And then maybe also, Matt, if you kind of address -- you guys paid down some debt, you used some of the free cash flow, just to kind of help some of the liquidity aspects of your business. But how should we start thinking about the business as you progress forward out of this uncertainty with COVID where M&A becomes maybe perhaps a little more prevalent. I know you've addressed in the past your comfort levels with certain ratios and percentages of leverage. But can you maybe kind of talk about that if that has somewhat changed somewhat with the focus on the improving margins? How should we kind of think about that process for you guys?

Yes, Marco, this is Pat. I'll take that question. This company has been built around both strategic M&A as well as organic growth. We don't expect to change any of that. We've continued to believe that deleveraging our balance sheet is important. But we also believe that we can deleverage the balance sheet while continuing to make strategic acquisitions. And that was the core philosophy that we've had for a number of years, and that will continue.

Marco, I want to add something because this is a really important point. Some of the effort we're putting into increasing our long-term competitiveness and some of the changes we're making to our operations has built a leadership team and an operating excellence ethos that is really going to work well when we start to do acquisitions again. And that could be any time. The point is these teams, I think, are well-positioned to integrate and execute on not only acquisitions of the size range we're typically in, but even bigger if necessary. So we're going to be very strategic, very targeted and very prepared to execute on a business plan after an acquisition, more than ever, I would say.

Got it. Very helpful. And last quick question, Matt. Just can you give us an update on the M&A landscape?

Yes. Pat and I worked together in that area quite a bit. I think that we have a handful of targets pre-COVID. Some were further along in terms of what we felt we could get accomplished. COVID definitely put a hold on some of those processes. We continue to work with those targets and continue to talk to them. I think the lack of visibility, candidly, still troubling. And while I think we've got, as I mentioned, a handful of opportunities, I think it would really suit our business. And we also -- I think, we need to careful to not get overextended until we really get a sense of where some of these markets are going.

It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Crawford for any additional closing comments.

Great. I appreciate everyone’s support and interest in our company. Again, we feel like we’re making progress, particularly in terms of refashioning our business to higher margins and higher quality of earnings and controlling the things that we can control. So thanks for your support. Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.