Good morning, and welcome to the Park-Ohio Third Quarter 2022 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 2021 10-K, which was filed on March 16, 2022, 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 will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed, Mr. Crawford.

Thank you, and thank you all for joining the call this morning. Generally, we're pleased with the results during the quarter as we continue to see strong activity across our business and increasing consolidated earnings momentum. The 22% increase in sale was driven by strong customer demand across most end markets, ongoing new business activity and increasing demand in some markets which have trailed during the last several years, namely rail, aerospace and oil and gas. Earnings have been slower to respond, but our results show continuing improvement as a result of price adjustments, operating leverage, key investments which lower our operating costs, and now the largely completed cycle of restructuring, which resized or closed 14 global locations without any significant customer attrition. While we see no notable weakness in our demand forecast at this time, the ongoing Fed tightening cycle will continue to introduce demand risk into our forecast. Despite this, we are buoyed by several factors. First, many of our customers have had their production constrained by freight, supply chain and/or labor issues. Regardless of end customer demand, we anticipate some amount of restocking at many of these production sites. Second, we continue to see record backlogs in our Engineered Products group as we benefit from trends in infrastructure investments or reshoring. Third, we anticipate that any slowing in growth will provide us the opportunity to capitalize even more on the investments we have made to drive value and performance in our business. Lastly, while the effects of COVID on labor and supply chains continues to linger, we will begin to pivot toward the additional focus of our balance sheet and harvesting some of the significant cash investments we made during the last couple of years to protect our valued customers. With that, I'll turn it over to Pat to cover the quarter.

Thank you, Matt. Our third quarter results reflect continued improvement in most parts of our business. First of all, we achieved record consolidated sales totaling $436 million, an increase of 22% year-over-year. End market demand was strong across each of our business segments. Sales in our Supply Technologies segment were again at record levels during the quarter and sales in Assembly Components and Engineered Products segment grew 27% and 15%, respectively, compared to the third quarter a year ago. During the quarter, adjusted operating income and EBITDA improved both year-over-year and sequentially as a result of the strong end market demand, increased customer pricing and the impact of restructuring efforts implemented throughout our businesses. As a result, we generated positive operating cash flows during the quarter, and we expect continued improvement in free cash flow for the remainder of the year. Our gross margins in the quarter were 11.6% compared to 11.2% last year. On an adjusted basis, our gross margins were 12.2% in the current quarter, an increase of 50 basis points year-over-year. The current inflationary environment has impacted our gross margins and has caused higher raw material, labor and operating costs in every aspect of our business. We have been successful in obtaining new pricing on many of our products, and we'll continue to actively pursue price increases with our customers to offset these higher costs. SG&A expenses were $43 million compared to $45 million a year ago. As a percentage of net sales, SG&A expenses were down from 12.6% a year ago to 10% in the current year quarter. Interest expense totaled $9.6 million compared to $7.6 million a year ago, with the increase driven by higher interest rates on our revolving credit facility compared to a year ago as well as higher average borrowings driven by…

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

[Operator Instructions] Our first question is come from the line of Dave Storms with Stonegate. Please proceed with your question.

Good morning, and congrats on the record second quarter. Just wondering if you could start by, just going in a little more about the backlogs that you're seeing in the Engineered Products and the timing of turning those into sales?

Dave, this is Pat. Throughout the last six to nine months, we've seen record orders, record backlogs and the timing of those pushing those orders through production ranges from six to nine months given the equipment being ordered. We've seen continued improvement in revenues. We expect that to continue. Key hurdles in being able to push capital equipment through your production facility is the ability of getting the supply chain in line. And over the last six months, we've seen some challenges on that front. We expect continued improvement. So the backlogs, we expect would kind of push through production through the first half of 2023.

And then just kind of on that supply chain front, I know you mentioned that freight has been a challenge. Are you seeing that starting to abate? Or are things like the water levels in the Mississippi continuing to cause headaches?

This is Matt. No, I would say that -- I mean, certainly, ocean freight, which is where we were most constrained both in terms of blank sailings and pricing has stabilized. Certainly, pricing has come down considerably. Also, I think, has availability and timeliness has come in a bit as well. I mean, some of our lead times had lengthened out to the better part of the year. So I do think we're seeing more predictable shipments, and we're seeing significantly better pricing, and I think we'll continue to see that going into the new year.

That's very helpful. And then from there, it sounds like you're starting to see demand remain strong and pick up as end users are resupplying shelves. Is that expected to continue into next year as well?

Yes. I mean I think in my opening comments, I referenced hard to suggest that the Fed will not succeed in diminishing end customer demand. There's no question. So I think our visibility is no better than anyone else's in terms of what that looks like with 100% chance of recession, I believe, at this point. So the good news for us is that there is a fair amount of restocking that has to happen as well as some industries that are still recovering. Aerospace would be a notable one. So we do believe that whatever happens with the end customer or consumer that we're better positioned than most. So that's positive. I would also say that given the robust growth in the business, some stabilization of the business would cause us, I think, to be able to take a breath. I think labor, I think is stabilized, availability has stabilized, but it's still not great. So I think that, again, I think whatever we give up, I think, in terms of growth rate, I think will be mitigated by the restocking and also will be a benefit to our operations as we seek to rebuild our margin line meaningfully.

Understood. All very helpful. One more for me, if I can. Just on the federal research and development credits. What's your visibility into those continuing into Q4 and beyond? Or is that more of a one-off?

Yes. Dave, this is Pat again. The current quarter R&D credits were 80% reoccurring and 20% were really one-off type credits. But one of the things that we've done over the last three years really since the Tax Reform Act is we have been focused on our tax planning initiatives around research and development credits, international opportunities, and we're seeing the benefits of that. We do not expect our efforts and our initiatives to slow down. We feel there's a lot of opportunity for us to continue to focus on reducing our effective tax rate anywhere we can. The third quarter was a good example now.

That's all very helpful. Thank you both for now. Hope you have a great, great rest of the quarter. Thanks.

Thank you. Our next questions come from the line of Jacob Moore with KeyBanc Capital Markets. Please proceed with your question.

Good morning, guys. This is Jacob on for Steve.

Good morning, Jacob.

I just wanted to ask my first question on the timing and confidence level in your free cash flow commentary. If end markets, they are relatively stable and even strengthen into next year, why are you confident that you'll be able to drive a big improvement in free cash flow? And maybe what kind of level are you targeting there?

Yes, Jacob, included in our working capital is embedded inefficiencies that have been caused by supply chain constraints, customer pricing being dragged out within our receivables. So there's plenty of opportunity for us to eliminate the excess. Clearly, some of the comments that Matt made around our supply chain and international freight and any improvement that we get will result in lower inventory levels. So most of what we're referring to relative to free cash flow going into next year is going to be a result of reducing that embedded working capital that we have since the start of the pandemic, which is roughly $60 million, as I mentioned in my comments.

I mean, I guess just a little bit to follow up on -- if the end markets are maybe flattish in '23 and '24, how much working capital are all of you think you need to run the business?

Yes. We typically -- it varies by business, but we typically feel a normalized level of working capital is $0.24 on the dollar. And I think that is the level that we're comfortable with, and that gets us back to historic levels. We have initiatives in place across every one of our businesses and goals that have been established to reduce working capital to take out some of that excess that exists. So if we see growth, which we expect to over the next year to 2, you can count on $0.24 on the dollar in terms of increased working capital.

That's good color. And then maybe a last one for me just to put a point on the debt reduction commentary. Do you guys have a quantitative goal for where you'd like the balance sheet to be and maybe what those targets look like as we look out to '23 and '24?

Yes. This is Matt, Jacob. We have -- pre-pandemic, we had an intermediate goal, meaning an 18-month goal to 24-month goal to be 3x debt-to-EBITDA. We continue to stand by that goal. We think by the time we can -- we've got a couple of businesses inside our portfolio that are performing at peak levels. We've got some areas that we need to focus on improvement. As we rebuild the earnings line, and we're going in the right direction, I think that -- and we're going to build off that success going into next year as we harvest some of the new business and become more efficient at it, we think the earnings line is going to continue to take care of itself. I think that, particularly as we get more efficient in the post-COVID era. So I think that from that perspective, I think that -- and also begin to harvest some of this balance sheet. So we stand by our goal of 3x. We're a bit higher now, but we believe the earnings are artificially deflated and that we believe we've got some money to get off the balance sheet. So that's still our goal.

And then if I could, just one quick one. I know you guys have done some restructuring, and you worked on -- working on in-plant efficiencies. But are there any businesses that you think are candidates for divesting at this point?

I think that we -- part of our process over the last, even predating the pandemic was around really focusing on our best products and businesses. So we have been focused on a capital allocation plan that really seeks to invest in businesses that we believe not only can grow but can grow at very accretive margins. So having said that, I think that we've got a great portfolio of businesses that work well together. But we've been unabashed in our desire to harvest assets where we see that it's appropriate. We've had a number of asset sales. As you know, we continue to seek asset sales. It has not been in line with disposing of a full business, but we continue to be rigorous in how we look at our business portfolio and how we can invest in high-growth, high-margin businesses. So I certainly wouldn't put that off the table.

Okay. Got it. Thanks for taking the questions.

Thank you. Our next questions come from the line of Yilma Abebe with JPMorgan. Please proceed with your question.

Thank you. Good morning. My first question is regarding the cyclicality of the cash flows and a recession. Perhaps you can remind us what was the cyclicality of the cash flows in prior cycles? And how could that be different this time around, given your current working capital build if we do have a recession in the next year?

Yes. This is Pat. As I mentioned previously, we've got some excess working capital, which obviously, in a recessionary period, would tend to come out of the business quicker. In addition, we have -- in many of our businesses, but primarily in our supply chain business, when recessions affect our sales, you've seen great cash flow come through because our working capital will be reduced. That's a big part of our business where we've got working capital-intensive businesses as opposed to capital-intensive businesses. So in a recessionary period, our diversification plays very well as it affects cash flow.

That's helpful. And then my second question is regarding kind of capital allocation. How do you think about allocating capital is more specifically purchasing your tradable bonds versus other uses of capital given that the returns for buying back the bonds versus other returns and other investments?

This is Matt. Let me begin by echoing Pat's comments. You've been around the company a bit. So you know that to the extent that we enter a recession that causes us despite some of the restocking to see our revenue base decline, we have been the beneficiary of large amounts of cash flow. I mean we've got in current assets about $850 million in the balance sheet. So the harvesting is pretty good there. It's not what we're looking to do, of course, but the scale of the opportunity is significant and proven over last business cycles -- and recession. So again, not to suggest we're sort of recession-proof from that perspective. So we've got some manufacturing businesses that are less, but I would also suggest to you that the restructuring that we just have gone through that resized 14 locations, those are some of the locations that were most exposed, I think, to some of the recessionary environment. So I think we're in a good spot if that happens, number 1. Number two, look, our priority, we're cognizant of where the bonds are trading. We have had a history at times of purchasing some bonds back. But I would tell you that our instinct is to continue to focus on the business and to support the growth that's in front of us right now, which, as you know, is in excess of 20%. So our priority is going to be going to be the business and supporting the business in the ways we have, and -- but we've got an eye on it as well.

Thank you very much. That's all I had.

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

Great. Thank you all for your time this morning. We appreciate your support and your insightful questions, and we look forward to showing continued improvements in the fourth quarter. Thank you very much.

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