Good morning, and welcome to the ParkOhio First Quarter 2021 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 2020 10-K, which was filed on March 5, 2021 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 reconciliation of EPS to adjusted EPS and for reconciliation of net income attributable to ParkOhio 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, President and CEO. Please proceed, Mr. Crawford.

Good morning, everyone. I'm joined here this morning by Pat Fogarty, our Chief Financial Officer. It would have been difficult to imagine during the spring of last year the speed of the industrial recovery underway. Our first quarter results demonstrated record levels of business in parts of our company. Improved bottom line performance due to operating leverage, accelerated by our ongoing improvements in our cost structure and an almost $50 million reduction in net debt year-over-year. Our success during the quarter was led by Supply Technologies. The combination of strengthening end markets and new business momentum propelled the business up 12% and March revenue was an all-time record. In addition, despite significant challenges in logistics and supply chain, our team was successful in seeing impressive flow through at the margin line. Bottom line is that Supply Technologies had a great start to the year. While revenue at Assembly Components was flat, we continue to see the benefits of an increasingly flexible cost structure, which was beneficial during the quarter in responding quickly to changes and challenges in the automotive space. Perhaps the best sign of success in this segment was a steady stream of new business awards across the product portfolio, which will underpin our next leg up in revenue and margin. We are well positioned to continue to benefit from the re-engineering of vehicles globally and in particular, electrification. Engineered Products results were lower than anticipated during the quarter, which is not surprising given the weakness in some of their end markets. But new bookings suggest we have worked through the trough and this traditionally mid-to-late cycle business is on its way back towards historical performance. These results highlight a few things; first, our diversity continues to be our strength; second, our improved and more flexible cost structure has provided not only improved margin flow through but also has enhanced our ability to react to an increasingly difficult operating environment; lastly, we expect to see progress toward our margin enhancement goals as the business environment stabilizes and we see improvements in our traditionally highest margin segment, Engineered Products. Thank you to all of our associates for leading our business through these challenging times. We're being rewarded for everyone's hard work and we are ready to move forward confidently into a period of sustained growth, improved quality of earnings and less leverage. With that, I'll turn it over to Pat to review the results.

Thank you, Matt. Our first quarter results reflect continued positive sales trends in most of our businesses despite supply chain constraints and weather-related disruptions that affected several of our operations. The positive sales momentum throughout the quarter was most notable in Supply Technologies, where sales were at an all-time high during the month of March. Also Assembly Components, despite the semiconductor chip shortage, which caused production delays throughout our automotive customer plants, performed well during the quarter and continues to launch more than 30 new programs in various facilities. Although we are not pleased with the results in our Engineered Products segment, which was challenged by low end market demand from the oil and gas, commercial aerospace and rail markets, we began to see increasing new capital equipment orders and strengthening backlogs in our forged and machined products group. Also during the quarter, we continued to implement margin improvement initiatives across each business segment, which we believe will drive higher operating margins as revenues increase. Our first quarter consolidated net sales were $360 million compared to $366 million in the first quarter last year and equal to our fourth quarter 2020 revenues. Consolidated gross margins in the quarter were 14.5% compared to 14.7% a year ago. Excluding charges in the quarter related to plant closure and consolidation activities, margins were essentially the same year-over-year as the cost reductions implemented last year and higher margins in Supply Technologies offset the impact of lower margins in Engineered Products. SG&A expenses were $39.7 million compared to $40.9 million a year ago, a 3% decrease, reflecting the benefit of cost reductions implemented during the past year. On an adjusted basis, operating income was $13.6 million in the first quarter compared to $13.5 million a year ago as a result of improved margins in Supply…

Great. Thank you very much, Pat. I'll comment briefly how excited we were to get back in the acquisition game. While a small deal, extremely strategic accretive, I think, very exciting to our Supply Technology business and also, I think symbolic of us getting back to our roots in terms of our DNA and our choice to try and grow through acquisition as well as organically. With that, I will turn it over to questions.

[Operator Instructions]. Our first question today is from Steve Barger of KeyBanc Capital Markets.

Great to see Supply Tech start so strong. Do you think this level of revenue is sustainable in 2Q and in the back half as customers ramp production?

I'll start. Yes. Again, I think that I commented briefly on a couple of different things. Certainly, we're seeing a robust environment in a lot of our -- in most of our end markets, not all, there is a few, most notably, commercial aerospace that continue to lag. But I also commented briefly on the new business, we've been focused, as you know, on new business for the last 18 to 24 months in a renewed and invigorated way. So yes, I do. I do expect the strength to continue.

That's great. So with that top line and the cost reduction initiatives, you -- it seems like we should expect 1Q is the kind of the low watermark on margins for that segment as we go through the year?

Yes, that's a great question. We're very excited about where that business is positioned. There is no question, as I mentioned and Pat mentioned, it was impacted by a variety of different issues related to expedited freight costs, port issues, supply chain issues, labor issues, so the volume increases are not what I would call level throughout the business. So planning and securing inventory and -- in the right places at the right time can be a challenge, so I think there's some opportunity on the margin side, but there's also no reason to believe that some of those inconsistencies will continue. And we are, like many, seeing some inflation in the system and we'll continue to, as we always do, to work to get ahead of that and use our leverage in the supply base to get the best deals possible, but that's going to require some pricing changes. So it's not -- I would say, the visibility isn't quite as clear as you've articulated, but we certainly feel that we're in a good place.

Understood. And for the acquisition, is that a -- is that pick up based on a specific product line or just the end market exposure that it has or -- and do you see revenue synergy opportunities as you look across your customer base?

Yes, Steve, this is Pat. Yes, a couple of things. In 2019, we acquired a very small electrical distributor and we believed at that time would be a launching pad to allow us to provide more electrical products within our customer base. What NYK brings is not only additional product lines, but also new customers and supplier certifications, which is very important to allow us to begin to penetrate further our commercial aerospace customers, where we don't have much electrical component sales currently. So we believe that all of the above, we believe we'll be able to continue to penetrate existing customers, allow us to talk to new customers about our electrical components that we can provide, which will generate significant synergies with our current customer base.

Steve, I would also add -- I'd also add that we -- another thing we like about this business, which is where we're focused on acquisitions is this business is adjacent, provides a lot of value for us in terms of marketing synergies. But the reality is they have their own growth story. This is a business that operates well, has good margins and has their own growth story with or without us, so we cannot mend it, we see tremendous strategic value but this is a business that's going to grow.

Got it. I'll ask one more and hop back in line. Matt, it's really good to hear you so focused on cost reduction and driving higher returns over time and I'm not asking you to name names here, but are there any business units that consistently under earn relative to expectations and maybe are working cap heavy that don't make sense for the portfolio, is there any opportunity for growth via subtraction?

We -- as you know, we spent the last couple of years sort of looking carefully and critically at our product portfolio and I do think -- and as mentioned in the past, that we have emphasized our allocation of capital to businesses that we think can outperform. So again, in that sense, I think we do -- will continue to focus capital on acquisition and organic growth, where we see above-average margins and -- at above-average growth. We have some businesses that maybe don't fit that profile, but in general, those businesses are tremendous contributors to our ability to generate cash, pay down debt and gives us flexibility through the business cycle. So I would not articulate that there is tremendous opportunity in that space. We like the businesses that we're in, that doesn't mean that we won't see some as we emerge and see revenues build, but that's the way we're thinking about it today.

The next question is from Marco Rodriguez of Stonegate Capital Markets.

I was wondering if maybe you could kind of give us a bit more of an update with a finer-tooth comb, if you will, on some of the launch schedules for just some of the components that all those parts that kind of delayed last year, kind of how should we be thinking about those product launches coming into this fiscal year?

Yes. I'll describe it at a high level what's happening. First of all, it is very difficult to plan for this business. As you know, a number of the product launches were pushed back and now, not only have they been pushed back, but to the extent, they've launched, we are seeing lower volume. So I do believe that we are in a -- we will continue to see revenues grow even against the headwind of lower volumes, but to articulate a number at this point would be challenging. But I would also say to you, separately as you think about the business going forward, I commented in the opening comments about the redesigning of the vehicle and electrification. Our business funnel is as a strong as it's ever been across our product portfolio, we are seeing tremendous opportunity. So while it's hard to answer your question in the context of the next couple of quarters, again, given some of the restraints in the supply chain that Pat's mentioned, we will outperform the market for years to come.

Got it. And then, revolving around the Assembly Components and your commentary on the impacts that you've seen from the chip shortages and what you're expecting here in Q2, another $10 million kind of headwind, I would have to assume you're expecting year-over-year growth, but is there an expectation that you'll see sequential growth in that business as well?

Pat maybe but quicker to answer this question. I would tell you that this -- the current environment in the supply chain and automotive is going to make a fool out a lot of a people in terms of trying to guess the next 3 to 6 months in terms of production. You've sort of seen, I think, Ford come clean was that last week on their production schedules, I think, Stellantis is now kind of coming clean. Our information candidly is not a ton of better than yours. So again, I think if we look holistically at the business over the next 18 months, given the backlog of the business that never hit us quite the way we expected that to come in and the new business, I think we're going to -- we will outperform the market, but I'm not sure I'm prepared to take any risk relative to -- we may simply see new business offset production losses in the near term. That's a real possibility and that would be okay. Pat, are you prepared to be more thoughtful than that?

No. I -- Marco, I think as you know this is -- it's fluid situation right now, every day you're hearing about different changes that are occurring with customer schedules. So it's hard to really comment on that. So I will stand by what Matt is saying in terms of we're going to outperform the market. We've got plenty of new launches and they cover so many different product lines and so many different plants that we feel real good about that. And our team is more than qualified to be able to launch that many products, they're accustomed to doing that. So we're confident in what they're going to be able to achieve.

I want to comment too, and I know this isn't your question, Marco, but whatever your political leanings, the vigor in electrification right now is a positive for our company. It allows us the opportunity to work on the design phase of some of the new products, obviously, our light-weighting products are all over sort of the battery infrastructure. The significance of light-weighting is more than ever and as it relates to other products that we service in the coolant area and the fluid delivery area, we're learning more -- as more energy goes into that transition, we're learning more about the applications that we can succeed in and it's getting more and more exciting.

I understand. Very helpful. Then kind of taking a look at one of your end markets, the commercial aerospace area, obviously, has been challenged over the recent past, as you mentioned in your prepared remarks, also as it continues to kind of lag in some of your other end market industries. I was just kind of wondering -- and I know that obviously you guys are excited about that space and its growth potential, can you maybe just kind of update us on your thoughts on the industry and what sort of expectations you might have for that to kind of return to growth mode and start to positively drive some revenue growth for you guys?

Marco, we have no reason to believe that the '23, '24 type estimates, we're returning to historical volumes are wrong. But again, that doesn't mean that we're not a net investor in the space. This is -- we're long-term investors. So we are confident, it's not if, it's when, but I would -- we do not expect this to be a significant tailwind for this year or probably not next.

Got it. And then, just wondering here in terms of the supply chain disruptions that you guys have seen from the inflation you mentioned on your prepared remarks, I appreciate the quantification of the impacts of some of the components, but there -- are there any other areas of the businesses where you saw, obviously, some issues where they were meaningful declines or meaningful impact to your financial results in Q1?

Yes. I wouldn't say meaningful, but I would comment that the price increases that we're seeing in certain commodities, we always react very aggressively to try to get ahead of it, as Matt mentioned. Our aluminum business saw a tremendous increases in pricing not only year-over-year, but also since year end and our arrangements and agreements with our customers is that we catch up to that, but there is a lag. And so in the first quarter, we were affected by that lag. And so, as prices begin to stabilize, we fully catch up and of course, we always benefit them with that same lag when prices decline. So I would say that is one business that we did incur additional costs at the cost of goods sold line because of that lag.

Marco, I would add, we need to recall that the majority of our business are -- either have indexing against raw material metrics, as Pat mentioned, or for example, in the net Engineered Products business, does not have long-term agreements. This is a project-based business or a -- or an aftermarket driven business. So the vast majority of our business can reprice as prices go up. Clearly in the auto space, we've got some LTAs that aren't indexed that we're going to have to work on. Clearly in Supply Tech, we've got some spots that are -- but a lot of that business is buy-sell and again, we can change pricing pretty readily. So the parts of the business, where we're exposed not just on timing, as Pat has mentioned, which is an issue, but also just terms of fundamentally is a -- is very much a minority of the business. So most of the impact will be reasonably short term. So I will tell you a reasonable amount of inflation is a very good thing for ParkOhio industries. Very good thing, meaning it makes our position in the value chain more valuable, makes our inventory more valuable, it makes our knowledge of our suppliers more valuable, it makes our process more valuable, it makes our people more valuable. So believe me, we're rooting for a meaningful, but a reasonable amount of inflammation for a sustained -- inflation for a sustained period of time, call it, 2% is a good thing.

The next question comes from Sarkis Sherbetchyan of B. Riley Securities.

So just wanted to touch on the NYK acquisition. I'm not sure if you had a chance to speak to the growth and margin profile of the business in the prepared remarks. I think you mentioned it has a good growth story, it operates well and has good margins. So if you can maybe provide some context around that statement, please.

Sure. We mentioned that we expect the business to exceed $10 million in revenue. Their margin profile is greater than the margin profile of the Supply Tech segment. So as that business grows, we expect to expand on those margins. And I think, the other opportunity that I did mention earlier, Sarkis, is the ability of their expertise relative to suppliers, our volume that we're going to bring to the table, allows us better pricing on the pricing grid. So it will have impacts to other parts of our Supply Tech business.

Understood. And when you mentioned better than Supply Tech's segment margin, is that on operating income margins or is that on the books?

No. Operating income margins.

Good, good. And what was paid to acquire the business? I know, it's $10 million in sales, but just trying to get a handle on whether it's also accretive from kind of a financial metrics perspective.

Sure, sure. $5.5 million net of the cash that they had on hand.

Great. And you mentioned kind of retaining the annual guide you provided from the prior call, so I suppose, as we work this incremental $10 million in sales in accretion to the model, it would be over and above the base level fiscal '21 guidance, is that correct?

Right. Yes. Sarkis, the $10 million doesn't really impact the range of targets that we've given and so, we wouldn't expect that to have a material impact on the guidance that we've given.

Okay, that's fair. And just wanted to kind of get a better sense for some of the working capital shifts quarter-on-quarter, I noticed inventories built up here, is that kind of seasonal, is that strategic? Just help me understand the magnitude of the build-up.

Sure. It's all of the above, but I think where we saw inventory increases in Supply Tech, part of it was to -- obviously, for customer demand that we expect to see in the second and third quarter, also they're based on logistics, the issues that we saw at the ports. Our job is to basically protect the customers and their requirements. And so with that, we've carried a little bit more inventory than we traditionally may have carried. Also the increases that we saw in inventory in Assembly Components was to cover new volume demands that were occurring in the second quarter in addition to the price increases that I mentioned earlier with aluminum, that increases the inventory level but in general, when you look at our overall net working capital as it relates to our -- an annualized level of sales from the current quarter. We are right in line with our historic levels at about 25% And so, there is a lot of inputs into that ups and downs in various working capital categories, but we are still -- our goal is to continue to bring that number and that percentage of working capital sales down throughout the course of the year.

Sarkis, that gives me an opportunity to mention the work done inside the business in the last 4 or 5 months has been heroic in terms of the products that we supply, in many cases, are just in time. As you know, some of them are by the ship, some of them a couple of days are in the supply chain. There are so many people around the business that have done some of the best work of their career in keeping our customer satisfied. So we're going to support them with inventory dollars necessary to make sure that their job's just a little easier.

No, that's fantastic. And one last one for me and I'll hop back in the queue. We've been hearing a lot of manufacturing companies in operations having difficulties with labor, just want to get a sense for how your facilities are operating on the factory floor in regards to labor and if there is anything you've started to think about or implement to kind of alleviate any potential pain points?

It is the issue of the day. It is the issue of the day. We -- there is nothing we're not doing in terms of thinking about how to attract and retain talent, in terms of making the onboarding process better, in terms of change in waste -- wage scales where appropriate, we've changed some of our benefit plans. At the same time, we're trying to make people's jobs easier and to be honest with you, the volatility in the marketplace in terms of demand from our customers is tough. The one thing no one wants to do is work 7 days a week. So we need to invest in the right places to make people's jobs easier and get people to a position where they can work 5 days and go home and be with their families. So this is a complex issue, but it's not just about cost of labor, it's about putting people in a position that they can succeed and feel good about their job. So a lot of our investment is going towards, I mentioned, flexible cost structure. We've been reducing our footprint, but we've also been investing heavily in our current footprint. A lot of that money is targeted towards operations, where we need to either increase capacity or create a better work environment. That's the key to, I think, creating a more permanent base of employment, but it will continue to be an issue and will continue to be something that -- every plant that I go to and I was at just one a couple of weeks ago and we are meeting with the senior team and I -- the HR person was new, and I said, you got the hardest job in the building. No doubt, she's got the hardest job in the building. So that's where we are, but again, I think where we're focused is making the quality of life for our people better and making their jobs a little easier. And yes, maybe having to compete a little bit on compensation and so forth. But that's not the answer, long-term.

The next question is from Steve Barger of KeyBanc Capital Markets.

Pat, for assembly, you said there was a $1 million reduction in net income on a $5 million delay on the revenue, should we expect that same percentage negative contribution margin on the $10 million in sales that you called out?

Yes.

So does that mean margin is probably flat or down in assembly in 2Q versus the 5.6% in 1Q?

Yes. I think the expectations are, we'll be able to offset much of that, but right now based on the information that we know on the shutdowns occurring, a $10 million has an impact of roughly 15% to 20% on our gross profit and we're working hard to be able to move our own cost down to offset that.

Steve, I want to use that comment to also say our team -- we've talked a lot about this restructuring and flexible manufacturing and the changes we've made. There is a part of this challenge on the revenue side and the shutdowns in the automotive space, that is good for our business. And what I mean by that is, we continue to reposition our manufacturing footprint and where we do things to be optimal for not only our cost structure, but also for what Sarkis and I just discussed about creating an -- a work environment people can sustain. So in a perverse way, we're seeing some opportunity in these shutdowns to do things that will benefit us for years to come. I'm not saying I want it, but we're going to get paid back for some of this because we can accelerate some restructuring moves and we'll get paid back later this year and to years to come. So we're not just sitting back and saying, hey, this kind of stinks. We're looking at it and saying, what can we do this year that maybe we weren't going to do until next year? And there is a number of those things going on right now.

That's a good perspective. And for the Engineered Products segment, specifically, you have the easiest comp at negative 33% from last year, do you think that similar returns to growth this quarter, is that probably not likely, just given the trends that you're seeing in some of those end markets?

I think, we started to see some of those growth trends in the month of March, Steve. I think we're going to continue to see the business sequentially improve based on the order levels that we're seeing in our new equipment business and in our induction business. So I think that's fair.

Yes. Steve, I -- we're -- this is -- our business is most directly exposed to oil and gas. So the -- that Steve, although we're seeing some activity there, despite what everybody says, we're still going to oil and gas, so -- for a while to come. So I think we're -- but this business is driven by the equipment group and as people have confidence this economy is going to grow, we expect to see first and are seeing a little strength in our aftermarket business and now we're starting to see, I think, the kind of substantiation in the new order bookings that Pat talked about in his comments. So we got a long way to go in that business to get to where we're used to but as I mentioned, we're on our way, we're on our way. And again, I want to articulate again, we're not done there, but we have made fundamental changes to how we think about the business and we have taken some opportunities again to reduce costs and create more flexible manufacturing environments, which is important. And we've also invested, I talk a lot about investing through the cycle. We have taken the opportunity there with new leadership at the business to invest in parts of the business and people that I think are going to be very exciting and change the business in the future.

That's great. Well -- and since we're on the topic of challenged end markets, I'll ask about one more, the rail business, I know that's been under pressure for a while. We are seeing sequential increases in rail traffic, we're seeing equipment come out of storage whether it's railcars or locomotives, any sense there that orders are picking up similar to what you're seeing in maybe the aftermarket of oil and gas?

Yes. In fact, more pronounced in oil and gas. And that should be not -- and if not when thing as well and I think that the when is starting.

Yes. I'll give you one example of that, Steve. In our forging business in Arkansas, which is primarily providing forged products to the rail industry, the month of March was a very good month from a sales perspective and probably at the highest level of monthly sales that we've seen in 1.5 years and almost 2 years. So I thought that was a good sign for that market. Now, it's a relatively small part of the business, but it was a sign that we could be seeing more upside there.

Obviously, we're optimistic that the infrastructure will hit that part too. Whatever they do in infrastructure, it seems like they're in violent agreement about rail and some of the more basic stuff. So we're excited there. I don't know if we're seeing as much activity on the locomotive side but candidly, that's a smaller part of the business.

Yes. That Arkansas business is more on the track maintenance side, as I recall, is that correct or am I remembering wrong?

Well, on the car...

In the railcar.

On the railcar...

On the railcar, okay.

There are no additional questions at this time. I would like to turn the call back to Matthew Crawford for closing remarks.

Great. Thank you for the good questions today, and thank you for giving us some time to talk about the business. Most importantly, thank you to all the ParkOhio people that make this happen. I truly believe we're entering into a very unique time in our history. I'm proud of the way we've allocated capital and I've never been more excited about the future. So thank you very much.

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