Good morning and welcome to the Park-Ohio Forth Quarter and Full Year 2021 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 maybe 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 certainties 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 a reconciliation of EPS to adjusted EPS and for reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA as defined, please refer to the company’s recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed. Mr. Crawford.

Good morning and thank you for joining our fourth quarter call. There are many challenges in the fourth quarter of 2021, but I want to begin by highlighting the continued momentum of our revenue growth. Despite significant demand volatility from our customers and the ongoing restructuring work within our business, our revenue was up 3% for the quarter and 11% for the year. More importantly though, our revenue outlook will benefit from growing backlogs and new business activity in each of our three segments. In fact, we expect 2022 to provide record or near record revenue levels. These relatively strong fourth quarter revenues came at a steep expense and resulted in an adjusted loss of $13 million. This loss overshadows a tremendous amount of work, which has been done over the last 18 months to increase profitability and lower our overall expense structure. Extraordinary costs related to premium freight, raw material inflation and labor as well as unpredictable customer production schedules lead to unreimbursed expenses and inefficiencies, particularly during the reemergence of COVID. While these costs affected all of our businesses, the Assembly Products Group accounted for the vast majority of these challenges. Reduced or erratic production schedules at customer assembly plants made managing operations efficiently extremely difficult and resulted in increased costs, especially related to premium freight. Additionally, the spike in aluminum and related raw material and our casting business and some of the labor challenges that were unique to our Midwest U.S. footprint and our casting business amplified these issues dramatically. We anticipate ongoing improvement in the segment as some incremental raw material pricing benefits the 2022 results and more normalized customer production levels occur as we move into midyear. We also anticipate the more normalized production schedules will create sizeable operating leverage due to the restructuring that…

Thanks, Matt. Before I speak to the details of our fourth quarter results, I want to make a few comments about our full year 2021 results. Overall, our consolidated sales met our expectations and customer demand continued to recover from 2020 levels as revenues for the full year were up 11%. We expect strong end market demand to continue throughout 2020. Our Supply Technologies segment, which saw full year sales growth of 21% and a year-over-year operating income increase of $13 million or 42% continue to perform well at difficult supply chain environment. Our capital equipment and forging backlogs increased in our Engineered Products segment at year end and we expect increasing demand in the oil and gas, rail and aerospace end markets this year. In our Assembly Components segment, volatility and demand, labor shortages and commodity inflation continued to be challenging, most notably in our aluminum casting business. During the year, our losses in our aluminum business negatively impacted our full year adjusted EPS by approximately $1.38 per diluted share. Our ongoing restructuring efforts in our Assembly Components and Engineered Products segments, which have included several plant consolidations to reduce our fixed cost footprint, will help drive improved profitability in 2022. Now I will review our fourth quarter results. Consolidated sales in the quarter were $370 million, up 3% compared to $360 million a year ago, with higher year-over-year sales occurring in our Supply Technologies and Engineered Products segments. Sales in our Assembly Components segment were lower year-over-year as a result of the continued impact of the semiconductor chip shortage, which has caused production volatility throughout our automotive customer base. GAAP EPS for the quarter was a loss of $1.48 and adjusted EPS, which excludes one-time non-recurring items, was a loss of $1.08. On a GAAP basis, our fourth…

Thanks, Pat. Before I open it up for questions, I want to take a moment and thank the Park-Ohio team. These have been very intense times in the global industrial markets, whether it be in the steady performance we have seen in Supply Technologies, some of the challenges at Assembly Components or the reemergence of the performance of Engineered Products. All of other people that work in our business are working incredibly hard. These are very, very challenging times. And I want to acknowledge the professional and personal sacrifice that’s happening throughout the business and thank everyone for their efforts. And reaffirm that the growth we are seeing in the business affirms that we have the right products and customers to succeed. Increasingly, as now we are substantially through a big portion of our restructuring, we have got the right operating model. We have got the ability to invest for the future and think long-term. And most importantly, we got the right team. So, thank you to everybody. A lot of good work was done in 2021 that we should all be proud of. Having said that, I am happy to put it in the history books. So with that, I will open it up to questions.

Thank you. [Operator Instructions] Our first question is come from the line and Steve Barger with KeyBanc Capital Markets. Please proceed with your questions.

Thanks. Good morning.

Good morning, Steve.

Yes, Matt assembly products in general. And now we know general aluminum specifically had a very tough year and looking at a tough start to ‘22 most likely. What can you do to make those businesses more resilient? And how’s the conversation dealing/going with customers?

Yes, great question. I want to start by saying, let’s not lose sight, I think of the strength of our product portfolio and our customers in our assembly components group, and specifically a general aluminum. The most of our peers saw in the automotive segment saw substantial deterioration in revenue, quarter over quarter. And we did kind of approaching flat. So the new businesses impacting more broadly assembly components, we saw revenue gains, in aluminum, a lot of that is driven again, by lightweighting. electrification, sort of the overhaul, if you will, of the automotive industry. So in spite of some of those challenges, I want to reiterate, we continue to be confident in the businesses that we’re positioned in. Having said that, the challenges to collect for re-unreimbursed costs, at every line in the P&L has been a challenge. And those conversations with customers intensified through the end of last years and continue today. So we believe we are a strategic supplier to those customers, we believe that we’re important part of the value chain, our quoting activity and our volumes, sort of prove that to some extent. And I think that we will benefit from that in our pricing model going forward. Again, I think our significant pain point was the fourth quarter. We think we’ll see the benefit of that. Some of it related to I think automatic pass-throughs, particularly related to aluminum, some of them will be the subject to difficult negotiations. Having said that, I do think we’ve sort of bottomed out if you will, and again, I think we’re strategically important to our customers, and the conversations will reflect that. But that’s not all about the customers, either. I think we have, it’s incumbent upon us to continue to focus on reducing cost, the…

Yes, understood. And you did say quoting activity is high, I guess, the quotes that you have out in the marketplace now adequately capture the current inflationary environment? And this is a question for all three of the segments. And can you structure contracts for quicker material cost adjustments?

Yes, that’s the big question these days, isn’t it? So let me talk big picture. And then we can sink our teeth into some of the tougher ones. I really need to applaud supply technologies and acknowledge their steady performance throughout 2021. And that’s, I think that really answers your question, which is, they were able to a large extent meet the incremental costs in their business model, not entirely, I would assure you that we have not recaptured significant amounts of premium expedited freight. Certainly on the cash side, we’ve had to invest heavily in increased inventories to protect our customers. But I think those guys have done a fantastic job, I think of trying to stay on the curve and that team is extremely focused, I want to compliment them. I will say in the Engineered Products Group, those not entirely but to a large extent, those are less LTA focused. So I think we have had the opportunity equipment’s an obvious example, right? We get to quote business at new margins, and then we obviously ship that product and start again on the next project. So over a fairly limited amount of time we’re able to, I think, re quote that business and make sure we’re sort of keeping up, if you will. Our challenges there have been sort of less about I think, pricing and more about refreshing pricing and more about supply chain and making sure that we can meet delivery schedules, that continues to impact performance in that business. Some of the challenges that you’re discussing are squarely focused on automotive. The automotive world spent, my whole business career, globalizing signing long-term agreements, all with productivity, leaning out everything in sight, and automating all things that don’t do well, in an erratic production environment. So, I think that is where we have been damaged. Again, we will see some support, particularly with aluminum as the contracts allow for some adjustments. But unfortunately, aluminum is not the only raw material we use. And a lot of those raw materials are not prone to quarterly adjustments. And we got killed in the fourth quarter. So, again, we’re working, I think, with our strategic partners to address that. And we expect that we’re important enough to get it. So no, I think for most of our business, call it 80%, we’ve either gotten ahead of it stayed on it, or have the opportunity to refresh more regularly. The significant challenges have been in automotive, not to suggest that people really hadn’t been working hard in the other businesses to stay ahead of it. It is the challenge of the day across the business.

Yes. And Pat, free cash flow was a use of $74 million last year, I think about half of that was working cap. What do you expect for operating cash flow this year? Can you just talk through, how that looks from a working GAAP standpoint, you already said you expect adjusted – positive adjusted EPS, and then maybe talk about CapEx requirements. Sorry, if I missed that.

No, no problem. Yes, next year, we expect our working capital levels to remain relatively flat. That is assuming that certain supply chain constraints will start to ease in the second half of the year. That would be a very positive sign, which will drive positive operating cash flow. We expect our CapEx for 2022, to range between $30 million and $40 million. We have to complete some major projects during 2022. Which would push that number to the mid-30s. But expect positive free cash flow in the current year.

Steve, I want to add that, we benefited from a non-budgeted cash benefit of a building in Chicago. During – we don’t forecast those things. And to be clear as we continue to restructure the business, we expect to see benefits like that unbudgeted benefits like that. I think that’s a particularly big one. So I wouldn’t think about it in terms of being overly material. But we will continue to find opportunities to benefit from the restructuring on the cash flow side, and offset some of that some of the capital.

Understood. Thank you.

Thank you. Our next question is coming from the line of Marco Rodriguez with Stonegate Capital. Please proceed with your questions.

Hey, this is Quentin dialing in for Marco. Thanks for taking my questions, guys.

Sure.

Just have two. It’s a – in the past. You’ve talked about all the activities and doing to improve manufacturing efficiencies. Can you provide some color on how much automation is playing apart?

Well, that’s a great question. And let me start by saying, we have invested heavily in automation across our business, particularly in automotive, where I think that that’s sort of the table stakes, I think, to drive efficiencies in the business. Having said that, I think some of the challenges, and some of the erratic production schedules are challenging the core belief that automation is always the right answer. I think that what where we have seen some challenges are if you automate a production line that expects to make 1,000 parts a day, everyday for the next 10 years. That’s a great candidate for automation. What we’re seeing, particularly in the automotive space, is that’s not how it’s playing out. The production line either needs 2,000 or needs 100. So, I would say that automation has been an important part of our growth and our opportunity to become more efficient to extract costs. But our team has to be incredibly nimble right now, because developing a standard cost sheet, to quote a job that relies on significant capital investment, fundamentally requires that volumes are stable and consistent over a long period of time. So, I would emphasize that what you say is true. I would also emphasize that that’s not a one size fits all solution. And the volatility in some of these end markets is making it more difficult automating, is exposing some of the labor challenges even more. And we saw some of that in our assembly products group, inefficiencies related to where the automation didn’t work for the production lines. So, I think that it’s – labor is still a critical part, access to labor in a way that suits the volatility, the customers and demand is still a very important part of this process. And just continuing to automate isn’t always the solution.

Okay. And secondly, is, could you guys talk about how you feel about your pipeline of opportunities heading into fiscal year 2022? And maybe discuss how the aerospace and auto industries pipelines are looking?

That’s a big question, by the way. So, I would say that I just was just back out again, back at it, reducing global production bills and sales numbers, but production bills for the world. Based on new data as it relates to the challenges in Ukraine and Russia, I have mentioned that while we didn’t have a huge direct exposure, we have some and it’s causing us to do some resourcing, etcetera and perhaps some additional expense. But to be clear, nobody fully understands that the indirect risk, I think to the war between Russia and Ukraine, we have heard, obviously, we talk a lot about industrial gases and neon and metals like palladium, wire harness production, it’s I think still playing out what that means to global production. Are you insulated in the U.S., maybe a little bit, certainly Europe is in the frontlines of that problem. But in general, I think that the first quarter will be unpredictable. But I think where we have recognized the restocking cycle, some increasing hopefully, visibility on the supply chain and pretty positive year-over-year growth on the production side in car for the second quarter, third quarter and fourth quarter. So, I think what that number is, I don’t know. But I think we can expect that to take a broader set of more predictable builds as the year goes on in auto. Aerospace, we are seeing incremental benefit. I mentioned that in my comments, rail as well. So, no, I think that we have sort of been waiting for those markets to re-emerge. And I think we are cautiously optimistic, not that we are going to see 30%, 40%, 50% surges in demand. But we will see very nice multiple of sort of GDP type growth.

Yes. I would add that within our supply technology business, I mentioned in my script that 600 new customers in 2021, 300, in the fourth quarter. Our customers rely on our supply chain expertise. And we are starting to see that. With the supply chain constraints that you are seeing around the world, we are seeing customers come to supply tech, because they know we can get the job done. And so the pipeline that we have within supply tech is solid, and we expect continued growth into the current year and throughout the current year. So, I think that’s an important part of our growth this year. I mentioned the backlogs in our engineered products group. That’s buoyed by increases in end market demand and in end markets that have been really stagnant over the last 2 years, rail, aerospace, oil and gas. We are seeing a nice pipeline of new business in that – in those markets.

Okay. It makes sense. Appreciate you guys taking my questions. That’s all I had.

Sure. Thank you.

Thank you. Our next questions come from the line of Sarkis Sherbetchyan with B. Riley. Please proceed with your questions.

Good morning and thank you for taking my question here.

Good morning.

I just wanted to focus on the balance sheet real quick. You sold some real estate here which essentially financed fourth quarter ops. You have plenty of own real estate as I look back on your previously filed 10-K. So, just point blank, do you expect more asset sales or maybe even some sales leaseback arrangements? Where do you think your operations will more than cover your liquidity needs to operate the business?

Well, I will take in reverse order. As I mentioned, we expect to be profitable this year. So, I think that that implies more positive EBITDA. So, we think that moving forward for 2022, we will be able to finance our own growth. So, I think to that extent, I don’t think we will need to injure the balance sheet, so to speak. So, that would be – that’s sort of prospectively where we see ourselves going. We paid heavily at your price to not only related to some of the unreimbursed expenses in the fourth quarter, but also building inventories to protect our customers. We will anticipate unwinding some of that as things get more normalized. So, that will provide I think free cash flow that will be important to our growth and our financial stability on the balance sheet. Yes, no, you are right, the math would suggest that we spent the money that we got from the sale. And as I said a few minutes ago, I think we will continue to see opportunities in the restructuring. I think that there are few, if any that will be the scale of that particular opportunity. But we certainly expect to continue to benefit from asset sales at the margin that we don’t account for in our forecast.

That’s helpful. And just kind of looking through the release, the definition of consolidated EBITDA was revised. Can you maybe go over the changes and amounts in detail? And I suppose, which of these components do you expect to recur in fiscal ‘22, if any?

Sarkis, I will address that. So, in November, we amended our credit agreement, which changed the definition of EBITDA. And as you know, historically, we have always used a defined EBITDA when disclosing what that is in our press releases. And if you look at Page 7 of the press release, we outlined the add-backs to our net income, the changes that were made in the current year were to allow for add-backs for non-recurring items related to restructuring and business optimization. Also, it allowed for the add-back of any COVID related expenses, which are either specific to that issue or labor related issues that we spent money on. On that particular item, I would expect that to wind down in future periods, because most of that money was spent. So, it allowed for a number of add-backs, most of the other non-cash add-backs were historically allowed for in that definition by our credit agreement. I would say that, when we look at that whole calculation, it doesn’t really – any debt service coverage ratio doesn’t come into play, unless we blow through an availability covenant, which is about $46 million. And we are very, very far away from that. So hopefully, that’s helpful for you.

Sarkis, I want to address what can be an elephant in the room, which is our leverage. As Pat mentioned, that’s not really specifically related to our liquidity. And again, we have stated not long ago, that our goal, our target leverage for the business was 3x. Now, that that may seem a little distant at the moment. But again, I think what our numbers are showing is we have got the inherent revenue and profitability in the business, particularly if you sort of think about the area of focus around general aluminum, we have the inherent revenue and profitability to rebuild, I think the EBITDA number to a point where that target is very much real again. So and then I think to boot we have got, well over $200 million worth of liquidity, which gives us the flexibility to continue and to invest, to build at or belong – at or beyond our historic EBITDA level. So, I am not suggesting it’s not an important metric. But obviously, with some of the challenges we had in the most recent six months, I think it’s a little less meaningful to the outlook of the business.

No, I appreciate the color. I guess this is a good forum to have the discussion, because clearly the market is judging the operations and kind of the environment and obviously pricing the debt and equity securities accordingly, right. So, just want to be able to kind of talk through this. And moving on to top line growth guidance of 15%, maybe if you can talk to the specific drivers of the growth and for example, how much of that is driven by pricing in your outlook and how much by volumes?

Sarkis, let’s start and go over segment-by-segment. Alright, I mentioned in my script that the backlogs are extremely strong in our forging, and in our capital equipment business. That’s due to a number of factors. One is the improvement in end market demand, in aerospace, rail, and oil and gas. We should see double-digit growth in that segment as a result of that. Those products typically are priced as you know, capital equipment, we are pricing those as we are negotiating the order. So, there is some element of pricing in those growth numbers. But that’s the nature of that business. In our assembly components group, I think the last 2 years have been so volatile relative to the impact of the pandemic and supply chain constraints. We expect some normal normalizing of that demand. In addition, we have launched a number of products in 2021. I will give you one example, which is about a $40 million block of business on a fuel assembly for the Gen 5 engine for General Motors. So, large blocks of business were being launched in 2021 that we expect to get to quoted volumes in in 2022. In addition, in supply technologies, I think the demand we are seeing is based on the global economy. Our business is 80%, 75% to 80% domestic. We are seeing strong end market demand across every key end market. And we expect that to continue in 2022.

Sarkis, I might add this color as well. Every – the vast majority of our end markets, I can’t say all, but let’s just say is the vast majority of our key end markets, certainly all the major ones. Since pre-COVID, we haven’t lost a material customer. And every one of those markets is seeing incremental unit growth in 2022, incremental unit growth. So, while it is challenging given the diversity and complexity of our business to answer your question directly on a macro basis, I think the important point here is we are seeing unit growth in all corners of the business. And we haven’t lost the material customer. So, again, we have got the – it is no surprise to us that we expect to be near or above record revenue. So and that’s still with parts of the business not hitting key unit growth, pre-pandemic unit growth, for example, oil and gas, for example, aerospace. So, no, I think that we can feel confident that this is not just about inflation. This is about unit growth.

Good. And the drivers outlined are certainly very helpful. And I guess if we kind of step back for a second, again, very important piece to this puzzle here. And you speak to solid profits for 2022 as a whole and positive net income for the year, right. So, my question is, what does solid mean, because it means different things to different people? And what is the cadence of getting back to positive net income look like there ‘22? Do we expect to have a little bit of losses here in the front half and then the profitability come through in the second half, or do you think it’s a little bit more evenly spread to get to that? What are you guys expecting for the business?

So, Sarkis, this will be frustrating to you, because I am the one that picked the word solid. And it’s we are not inclined to give any guidance right now. So, I think we got to leave it at that. I think the point is, I suggested solid, because we are not trying to just say we are going to make one penny. We are not just trying to push it over the breakeven point. We believe we can be profitable in the context of the kind of revenue we are forecasting, so almost impossible to give you more granularity than that. But we are just not – we are not trying to just try to nose or get our nose over the finish line here. We are trying to begin to rebuild the margin and benefit from the restructuring that we saw. And if we can achieve those goals, we would expect to see substantial improvement. In terms of the cadence, we think there is a lot, that is, we will – there are a number of things we have discussed that will benefit the early part of the year. But to be clear, the early part of the year was continuing to be a challenge. Omicron was still a big factor in our business in January, a big factor, whether it was a business a challenge in February. Supply chain, in some cases is worst than it was a year ago. So, we will benefit from some of the things I discussed. Pricing issues, I think some improvements, I think as we eat into March in particular. But the punch line is the cadence will be measured as the year goes on. And it’s based on some of the assumptions that we have discussed. Some things will benefit us regardless, and will start in the first quarter, some won’t. So, the cadence would be decidedly incremental as the year goes on, not a hockey stick, but incremental as the year goes on. Looking forward is the best we can do.

No, no, it’s helpful. Thank you very much.

Thank you. Our next questions come from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your questions.

Hey, guys, thanks. Just a couple follow-ups. Pat, appreciate the comments on the segments. And I think you said EP will be up double-digits. Does to the new product launch activity gets you to double-digit top line growth in assembly?

Yes.

And supply tech, obviously, very tough 21% comp? Should we be thinking that’s more single-digit, or is there enough activity out there domestically to drive that towards double-digits?

I think that’s reasonable, Steve, that to assume another 21% is unrealistic. But I think you can assume that it will be more single-digit type growth.

Understood?

Steve, despite their pretty stable performance over the last year at the revenue and the profitability line, and very much needed and appreciate that team’s effort. It’s a little bit like the classic duck. There, it looks very calm on the surface, it’s not calm on any surface. I mean the amount of notifications these guys get on Friday for what customers are going to shutdown the next week is still unprecedented. So, it is expedited freight. These are all fundamental issues that they are working through. So, it’s going to be tough, particularly in the early part of the year against as you pointed out pretty strong comps. Those guys have done a great job and we expect them to continue to doing great job.

And last one, I know you don’t want to get a lot more specific around the guidance that you have given. But just given everything that we talked about in assembly components, is it reasonable to think that even with improving activity in supply tech and EP, the consolidated EPS is probably still negative in 1Q at least, before you start to get that sequence of cadence through the year, or do you think you can be positive in 1Q?

Steve, we just can’t answer it. It just as I apologize, but we can’t go there. I can’t emphasize enough that we are having important conversations with key customers and asking the question, how important are we, right. I think the results of those conversations matter. And those are particularly true. And again, I have confidence that we are very important. But these are tough times. And these are tough customers. So, it would be impossible, particularly on an EPS basis to answer that question.

Understand. Thanks so much for the time.

Thanks Steve.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Matthew Crawford for any closing comments.

Great. As I mentioned earlier, glad to put this one in the history books, but couldn’t. We are more proud of our team and want to re-emphasize that we have a great, bright future and a lot to look forward to here and again, upward and onward. Thank you very much.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.