Good morning and welcome to the Park-Ohio Second Quarter 2024 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. [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 2023 10-K, which was filed on March 6, 2024, with the SEC. Additionally, the company may discuss adjusted EPS, adjusted operating income and EBITDA as defined on a continuing operations or consolidated basis. These metrics are not measures of performance under generally accepted accounting principles. For a reconciliation of EPS to adjusted EPS, operated income to adjusted operated income and 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 everyone and thank you for joining this morning's call. We're excited to announce record revenue for the second quarter, as well as continued improvement in our margins and overall quality of earnings. We accomplished these strong results against a backdrop of stable, but mixed demand especially in our short-cycle businesses and excellent operating execution across most of the product portfolio. Our diversification once again proved to be our strength, and in particular our investments in aerospace and defense were important positive contributors. Supply Technologies and Assembly Components group, both relatively short-cycle businesses, offset some softening demand in a handful of discrete end markets, with new business and strong execution. While our Engineered Products group a relatively long-cycle business, continued to see elevated backlogs and benefited from some improved delivery performance. While we expect some variability in our second half demand picture, in the aggregate we see our business as very stable and expect to deliver year-over-year growth. We also expect to make continual progress on our debt reduction goals, and see the second half as meaningful from a free cash flow perspective, which is both seasonal and strategic given our change in business mix and lower capital requirements, after the sale last year of some automotive assets. With that I'll turn it over to Pat. Presenter Speech

Thank you, Matt. We are pleased with our second quarter operating results, which exceeded our expectations in most of our businesses and were highlighted by record consolidated sales of $433 million, adjusted EPS of $1.02 per share and EBITDA as defined of $39.4 million. Our strong results were driven by record sales and increased margins in our Supply Technologies segment, better-than-expected results in our Assembly Components segment and record sales and improved margins in our Engineered Products segment. Net sales of $433 million compared to $428 million, a year ago and increased 4% from $418 million last quarter. Our second quarter revenues resulted from increasing demand in certain key end markets, with notable strength in the aerospace and defense market, continued growth in our proprietary fastener manufacturing business and improved sales in our capital equipment business where strong backlogs are being converted to sales. Our consolidated gross margin was 16.9% in the quarter, up 120 basis points from the second quarter of last year. On a year-to-date basis, our gross margin increased 90 basis points to 17% compared to 16.1%, a year ago. The year-over-year improved gross margins are a direct result of ongoing efforts to improve customer pricing, reduce operating costs and increase operational efficiencies throughout each of our businesses. We continue to focus on gross margin improvement, through the implementation of value-driven initiatives in each business. Our GAAP EPS of $0.95 was up 67% in the quarter, and our adjusted EPS of $1.02 increased 23% compared to $0.83, a year ago. Year-to-date, adjusted EPS of $1.87 was up 21% compared to the same period last year. As I mentioned, we generated EBITDA of $39.4 million in the quarter, an improvement of 10% compared to a year ago. As a percentage of our sales, EBITDA margin was 9.1% in…

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Good morning.

Good morning, Dave.

Just hoping we could start with maybe some of the puts and takes on guidance. I know previously you were guiding to mid-single-digits. It looks like that might be coming in at the lower end of that previous guidance between 2% and 4% on the top line. Are there any end markets that you're seeing as have an outsized importance for this guidance, anything that could put you on the higher or lower end? Really any color here would be great.

Yes, it's a great question. I think that broadly described the sort of business-to-business capital industry manufacturing side of the business continues to be strong. Where we are seeing a very different view is in our book of customers that are more consumer-facing. So I think that, it's a little hard to predict right now quite candidly. There's a lot at play, but it doesn't disconnect too much from what you read in the Wall Street Journal. What is unusual at an extremely high level is the difference between where you see pockets of strength in any market connected to aerospace and defense as we described steel for that matter electrical. Again, parts of the automotive business where they're reshaping it regardless of powertrain, all continue to be fairly positive but things that are a touch more consumer-facing are problematic. And those -- the difference between those are double-digit growth versus double-digit shrinkage. So, I don't know that I would describe our forecast as meaningfully different. I think we have to appreciate the risks that weren't here to the downside if you will in the prior or three months ago, when we had this call, particularly on the consumer side. Everything just feels a little more delicate but having said that, in no way do I want to suggest in the aggregate we don't feel that the positives outweigh the negatives, and feel strenuously that we'll have a stronger second half than we did last year.

Understood. That's very helpful. Thank you. And then just looking at Engineered Products, it had a really strong quarter kind of top to bottom. I know you've mentioned in the past that EP is really an important driver for the company. How would you categorize the sustainability of this quarter's performance in Engineered Products?

Let me -- I'll give Pat a bit to think about that while I answer the easy part. For those of us that have been around this company for a while, we recognize that Engineered Products should has been and will be again the driver for quality of earnings in this business. In that segment, we have some of the most unique assets, some of the best brands and also a nice diversification of aftermarket versus OE. It's really a nice business and has been a leader traditionally in terms of our business both on the sales side periodically and also it's a long-cycle sales business is a bit lumpy, but particularly on the quality of earnings and margin side. We have sacrificed some of that due to execution as we've discussed in prior calls because retirements lack of knowledge, supply chain challenges that while they become a little easier or still challenging changes in geopolitics and how you source products. These are things that we continue to work through. And every day we get a little better but they're not a late switch. So that journey is underway. It hasn't been a demand issue. It's been an execution issue. We have made meaningful changes there in terms of personnel. We've spent meaningful dollars in terms of training. We've made changes in leadership. We continue to attack this from all levels. So what I would tell you is from a historical perspective that business is still underperforming meaningfully underperforming. So I don't mean to suggest that it's a low bar but we would expect to see maybe again it could be a bit lumpy but we continue to expect meaningful improvement in that business over the medium-term.

Yes, Dave, this is Pat. I agree with Matt's comments. I think when you look at that segment of our business we have seen meaningful improvement in our Industrial Equipment Group. The backlogs have been strong. The bookings have been pretty consistent quarter-by-quarter. And the operational performance has improved to the point where we're approaching those double-digit operating income margins in that business. The acquisition of EMA is in the transition into our business is underway. We get a lot of good things to happen throughout Europe as a result. They are performing as planned right now and their backlogs continue to be strong. The challenges that we've been faced with have been isolated in our forging group. As Matt mentioned we've made meaningful changes across the board in leadership not only on the plant floor but across all aspects and all disciplines of the business and expect our customer base to continue to support that business going forward. So we expect improvement there and to get back to those historic levels that Matt mentioned. So that gives you a little bit more color, but we feel we're heading in the right direction there and we expect continued improvement.

Understood. That's great color. Thank you. I’ll get back in queue.

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

Thanks. Good morning.

He, Steve. How are you?

Okay. I think Pat mentioned in his prepared remarks increased pricing on some low-margin product lines. What percentage of the portfolio do you think is not priced for the value that you provide. And can you accelerate price actions in those areas?

Steve, this is Pat. Yes, the answer is, yes. And we've proven over the last few years that we've been able to get pricing across to our customer base. And as we've talked about the labor inflation that we've experienced has been permanent and we're still working to recover much of that. The raw material side of price increases has been mature for customers to understand. But we continue to look for ways to increase product pricing especially within the automotive segment as volumes are lower than what was expected [Audio Gap] Not going to be a material improvement but coupled with operational efficiencies value-driven [Audio Gap] all of which will be a driver towards improved margins in that business.

Steve, I would say that if there's such a thing as a silver lining to COVID. I think the leadership in the business across the board and Supply Technologies was an early mover and thoughtful on it across a very complex portfolio of products was pricing was addressed aggressively. And we had some pains as you know particularly in the automotive segment on that front and that caused some losses. And we've got ourselves in a much -- much more stable circumstance. The good news is as Pat described while there's always opportunity the opportunities are more limited. But nonetheless, I think that the inflation that exists in the market the ongoing demand in certain pieces allow us to keep focused on it to keep pushing the lessons that we've learned from the past keeping an eye on additional areas of volatility like freight. So I think the dynamics have changed in a positive way. Having said that, I don't -- I agree with Pat the opportunity for it is not as meaningful as it would have been in the prior couple of years. .

Yes. As you think about the new business that you're quoting, do you have more flexibility in there vis-à-vis escalators and that sort of thing than you did historically?

Yes, that's -- contractually, that is an interesting question. There's no doubt that there have been challenges in the marketplace to some of the customary design of products and relationships. I can tell you deemphasizing through asset sales, the automotive business, that's where the pressure is always worse and is at its worst. And I think that, that again, I talked a lot about having changed or evolved business model to make us more sustainable from a quality of earnings in a sustainable earnings and a free cash flow earnings through the business cycle, this is part of it. So, no, there's no doubt that the evolution has been in the supply basis favor. Our business mix has been in our favor. Having said that, we deal with the biggest, most sophisticated companies in the world, their hands are always out. They always want the best deal. So I think that what we need to preserve and make sure is that we can meet them in the middle. And we have spent a lot of time over the last few years reducing our cost to serve, and we continue to do it, whether they be in implementing pure restructuring and reducing footprint as we've discussed, whether it be implementing new software tools and technology. Our positioning of our business today is meaningfully better in terms to get awarded new business at attractive pricing that's accretive to our business model. And that's what it's all about, right? That's what it's all about. So, I think that as we focus and begin to see the needle move a little bit in the second half and into 2025 on these new blocks of business, we're going to see better margins. Part of it because, as you described, the marketplace is a little bit different, but part of it is because we reduced our cost to serve.

Yes. No, that's good color. And I guess as you think about your sales force, do they have an understanding of the hurdle rate required to bid new business? Do they have the tools they need to make sure that you do walk away from business that is less favorable, when it doesn't make sense to take it?

Yes. No, there's no question. I think the most certainly, the ACG and engineered components, the size, the sheer size of some of the orders and opportunities and nature of the long-term agreements get a lot of attention from the whole executive team. Supply technology certainly is the most complex business where a lot of people touch pricing in the process, and some of our best opportunities are some of our smaller accounts. So, no, there's no question that's where we have -- continue to try and invest in business processes that identify not only low margin or underperforming accounts, warehouses, whatever end markets you name it. But we continue to invest heavily there in technology tools to make sure that we don't make mistakes. So no, you're absolutely, I think, hitting an important point. And I would tell you, to the extent -- most of our portfolio are big orders that get attention with big companies and long-term contracts. We are -- I won't say best-in-class, but we work every day to be best in class to make sure that our team makes the right decisions, even on the small orders at a place like Supply Technologies. And I'm confident that today, we're meaningfully better than we were a year ago and two years ago. And I think we're going to be twice as good a year or two from now, given some of the investments we're making. So no, I do feel pretty comfortable and again, I don't want to say a silver lining to COVID, but we have to address pricing across the board. As a matter of life and death, you get a little better at this stuff, right?

Steve...

Right. And Pat, you said -- oh, sorry. Go ahead.

I was just going to add that when we look at hurdle rates, whether it's with sales folks or the executive teams that run the business, we go very deep into that process and look at IRRs, return on capital, if there's capital needed. So -- and those hurdle rates are well described within each of the business. So I would say that that's been an evolving process with each of the -- whether it's the financial teams within each business or the sales teams within each business. So, I feel very good about kind of where we're at as we look at opportunities across the board.

Steve, I want to say one last thing. As we think about where we have underperformed, it hasn't been because of poor quoting, or not understanding our hurdle rates. It has been by poor execution. And we've seen that a bit in Engineered Products. And again, I'm not -- I mean we see it everywhere, but I'm saying some of the challenges of the retirements, of the loss of knowledge, those kinds of things affected our ability to convert some of the orders at what we expected. I'm not so sure that's a pricing issue or a visibility issue. I think it's more an execution issue and one, we're again trying to get better at every day.

Understood. And Pat you said bookings were good in some parts of Engineered Products. Can you talk more about that? And what were orders for the company this quarter?

Yes. So the bookings in the quarter see were $50 million. And really across several of our brands in both Europe and in North America is where we're seeing the most strength. Backlogs continue to be good and the operational improvements we saw at least sequentially, we believe are sustainable and having better throughput through the plants with a strong backlog is good and it takes out a lot of the inefficiencies that we see in the plants.

Yes. And I guess that's a good segue to my last question. I heard you say free cash flow will be better in the back half, typically is. But did you say what you expect for full year free cash flow realization?

No I did not comment on that but we expect second half free cash flow to be $25 million to $30 million. And year-to-date, we're at $13 million. So, those are hurdles that we expect to exceed, but I'm comfortable laying that out for you right now.

Okay. Appreciate that. Thanks.

Steve, I'm not going to miss the opportunity to say, achieving record results after having sold a business that represented about 12% on average of our sales, but 20% to 25% of our CapEx through the business cycle has changed our mix from a cash flow perspective permanently. So, I'm not saying we have enough good ideas we may spend a little more here, but we are fundamentally a different business model from a cash flow perspective post sale.

I mean yes that's kind of my point on some of the pricing questions. You -- by exiting low-margin business where there are structural challenges to pricing the whole portfolio becomes better. And I have to think there's other opportunities to do that. You guys provide a lot of value to your customers. If you're not getting adequately compensated the question has to become why are you doing it?

You're preaching to the acquirer. And as I said, we're better today than we were last year and we're going to be better tomorrow than we are today. So, we are making the investments necessary to do that. And I would again highlight the use of technology as a key driver, particularly at Supply Technologies and making those decisions. The devil is in the details, but your point is absolutely well made, but we've made some real strides in this area and we expect to continue to improve. But again, we've done it a couple of different ways. So one structurally, we just got out of a business that was too damn hard in this area. And we've moved to businesses where your point is we've got a little more leverage, a little more ability, a little more opportunity to get paid fairly. And that was very difficult.

Exactly. Yes. I'm sure you sleep better with that gone. Thanks.

Our customers are big and tough and we got to do the right thing by them. So this isn't a straight line.

Appreciate it.

Thank you. Our next question comes from the line of Jamie Wilen [ph] with Wilen Management. Please proceed with your question.

Hi. You talked about the pickup of business in the aerospace and defense side, could you give us a little clarity on that? Are these new customers, existing customers with new projects, the longevity of these projects? And how would you characterize the margins on the business you're picking up versus your existing business?

Yes, I'll kick off. I'm sure Pat has a thing to say. One of the nice things about seeing some additional activity in aerospace and defense, it does touch a large percentage of our product portfolio. And that's good news. So we have seen significant discrete opportunities in our Engineered Products groups related to defense, particularly in capital equipment for building things like ammunitions and so forth. So very discrete there. Also on the aerospace side and defense side as well, but aerospace in particular, you may know that five or six years ago this became an area that we felt was a great adjacency for Supply Technologies and that those customers would appreciate our service model and our brand. And so that business has grown nicely. We had to sort of fostered a bit and supported a little bit during the more difficult times. But now that they're trying to reorient their and improve their supply chains, I think we're in a great place. So we've seen the benefit of there in supply technology. So we've seen a fairly diverse and impressive and I think sustainable improvement in those areas.

Jamie, this is Pat. Matt mentioned the supply technology business and we think about the OEMs on the commercial side of the business, Airbus and their Tier 1 suppliers, we're supplying product to. And the growth opportunity is to supply more product different types of Class C componentry into those various programs. The margins typically are higher than other end market margins. So that business continues to grow and we're seeing tremendous opportunities not only throughout Europe but also here in the States for those products.

When talking about how it impacts our broader portfolio, I should have talked about our Forge Group. We should highlight there that for a while, we were significantly – or past due and unable to deliver because of the struggle to get aerospace grade alloys to the forge, which the whole industry was seeing and gets talked about a lot at the highest levels at Airbus and Boeing. Those supply chains have improved a little bit. So we're able now to convert some of those orders. So again, I don't see this as a flash in the pan. I see this as an industry that is reinvesting in on the defense side and I see it as a commercial side that is just only beginning to sort out their supply chain issues and we want to be there to support it.

Excellent. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

Thank you again for your time today, and I want to thank all of the Park-Ohio family of people that come to work every day and make this happen. That's what it's really all about. And we're again very pleased with the results. But at the same time, there's plenty of room for opportunity for improvement. Steve, you gave me a nice opportunity to talk about how our business model is evolving and we expect continued deleveraging, continued improvement in quality of earnings, which to us means higher aggregate margins and better sustainable business on the free cash flow side. So that's where we're going, and I think this is a nice step in the right direction. Thanks, and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.